Default - what is it in simple words
The modern world economy is unstable. Every person who even remotely follows the news in the economic sphere has heard about the threat of default and its possible consequences. But not many know what it represents. The topic of today's conversation will be default, types, consequences and what it is, I will tell in simple words.
Default is the inability of the borrower to fulfill payment obligations to. We are talking about the impossibility of paying part of the debt or interest, and the failure to comply with the conditions of the loan agreement. Such a situation is peculiar to a private person, enterprise, and even the state.
In simple words, default is non-return of a debt for a specific reason. People confuse this phenomenon with bankruptcy, which is a blunder. In fact, the default is a condition that preceded bankruptcy, characterized by a formally confirmed inability to repay the debt. There are several reasons for default. I specially systematized them.
Causes of default
- Ill-conceived economic strategy. As a result, an economic crisis sets in, reaching for a hand with an imbalance in the state budget. The government of the country is trying to compensate for the lack of money by foreign borrowing, which increases foreign debt.
- Abrupt change of political regime. Such changes strongly affect the country's economy, leading to a stage of regression, which leads to a rapid decline in revenues to the treasury.
- Revenue reduction. The shadow economy and high tax rates negatively affect the budget. As a result, the state is forced to compensate for the missing funds by lending from international credit organizations.
- Unseen circumstances. Military actions on the territory of the country, the global crisis and other unpredictable events end in default or complete bankruptcy of the country.
Next, I will consider the types of default and the consequences for the country and the population.
Types of defaults
The causes of default are varied. The government's mistakes and the measures taken by competitors can lead to bad consequences. Any rash action in the field of finance and economics is fraughtthe appearance of obstacles on the way to the result and is capable of bringing the country to full bankruptcy.
- Technical. Appears when the borrower defaults without explaining specific reasons. At the same time, there are virtually no obstacles to meeting the conditions. The main reason for the technical default is the unwillingness of the borrower to repay the debt and the refusal to provide documents relating to the maintenance of the loan agreement.
- Sovereign. The economic downturn results in such a default, as a result of which the country stops paying external debts. The consequences are long-term in nature and are represented by economic stagnation, loss of credibility with international lenders, the depreciation of the national currency, a shortage of investment, a reduction in export financial flows, a decline in GDP and continuous litigation.
- Corporate. Appears when an individual, enterprise or country is unable to pay interest on bonds. A corporate default is considered a de facto bankruptcy, and the debtor is protected in court against the pressure of creditors.
- Cross. It appears as a result of signing a contract with certain conditions, when the failure to fulfill specific points on one loan leads to default on obligations under other loan programs.
It seems to me that by this time you understood that a default, regardless of the type, is the result of wrong actions in the economic and financial sphere. Even developed countries with a strong economy are not insured against it.
Consequences for population and economy
With the concept of default, we figured out. Varieties and causes are also considered. It is time to pay attention to the consequences of default for the population and the economy, which, oddly enough, can be positive and negative.
- The refusal of debt payments negatively affects the financial rating of the country. The loan market is completely independent, so no one can force to lend to the state that refused to pay. Without financial insurance, the country has to rely on domestic minimum reserves.
- The national currency is a measure, the value of which depends on the level of confidence in the country.With a default, the possibilities of the state are reduced, and the currency is destitute in the eyes of partners. The depreciation of the currency leads to a retardation of the domestic production of goods. Suffer from this and incomes of citizens. Default can lead to hunger, especially if the state is dependent on imports.
- Often, a default is accompanied by a complete halt in production. Almost all technological chains include a foreign factor. It is about financing and equipment. The multiple increase in the cost of production due to the depreciation of the currency makes the company unprofitable. As a result, it closes and people lose their jobs.
- Suffer from a default and banks. When a country finds itself in such a situation, banking organizations lose access to foreign loans and face multiple increases in debt. As a result, banks go bankrupt, and private firms do not receive loans for development. Also frozen accounts of citizens and enterprises.
- As the state refuses to pay debts, political distrust increases, accompanied by constant refusals of cooperation.Interstate funds and other states do not lend to the country, which leads to a halt in domestic economic projects. Naturally, in the absence of financial resources, political issues become much more difficult.
Now I propose to look at default from a different angle. As I have already said, the consequences can be positive.
- The default comes at a time when the debts of the state acquire colossal proportions. Payment of debt and interest on it is carried out at the expense of the state budget. At the same time, funds are not allocated for solving problems that play an important role in the existence of a country. In case of default, it becomes possible to direct funds to solve internal problems suffering from a lack of funding.
- A default is a tool to increase the competitiveness of domestic production and the economy as a whole. Since people receive a salary in a depreciated currency and save in every possible way, the goods produced for external buyers become more affordable due to the reduction in labor costs and cheaper resources.As a result, overseas orders are increasing, new jobs and additional capacity are being created.
- Against the background of a default, the country's economy is being rebuilt. Being isolated from imports and foreign investments, the state is reaching a safe level of funding. It is about domestic consumption and domestic sources of financing. Under normal conditions, to make such a transition is problematic.
- With default there is a catastrophic fall in the financial sphere. In such conditions, the blown branches of the economy lose their working capacity, the role of production and goods increases. The default prevents the organization of financial prekos, due to which the values acquire a real price.
- The country has a chance to agree with creditors on reducing the amount of debt. Lenders, trying to recover funds, make concessions.
Default is not a disaster. Experts argue that this is a negative factor in the development of the national economy, which contributes to the recovery of the financial sector. If a country corrects mistakes and chooses the right direction of development, it will take the lead.This is an excellent chance to change everything, but ordinary citizens have to pay for it.
Examples of defaults in the history of countries
Having carefully studied the history, it is clear that many countries have long declared defaults. For many states, loans are the only source of income. In this case, the lender is external and internal.
Often people who manage the state decide not to return lent money and do not fulfill their obligations. The spread of this practice is stopped by the fact that with regular declarations of default no one will lend money.
In 1327, England faced a default. King Edward III refused to fulfill debt obligations to Italian banks, which lent a considerable amount to his predecessor.
At that time, the reasons for the appearance of problems in the economy were diverse. For example, the refusal to repay a debt was caused by the lack of money or the unwillingness of a strong state to pay a weaker country. In the case of the English king, the cause of the default was the reluctance to pay off the debts of the previous authorities.
A whole series of defaults began after the First World War, when many Western European states owed to the States.In 1930, the British government refused to repay the debt, after which other states followed its example. England, unlike the rest, argued the refusal of backward indebtedness from the United States.
In the 21st century, monetary relations are conditioned by regulations governing the credit relations of the parties at the international level. At the same time, the procedure for making payments and the fulfillment of obligations by the debtor are more disciplined.
Defaults are recorded in the new history. Even rich countries refused to repay debts. In particular, the French government for three centuries, starting from the XV century, once in 30 years declared defaults. Under the capitalist system, such an approach became unprofitable, since the low solvency of the state undermined confidence in the international arena.
There are cases when defaults became the cause of wars. So, Napoleon III after receiving from Mexico the refusal to pay debts, declared this country a war that was of colonial character.
In 1918, the Bolshevik government refused to pay the royal debts.By the end of the century, they depreciated, after which Russia, under the leadership of a democratic government, repaid part of the debt.
It is impossible not to note the events that took place in the late summer of 1998. The default of that time was preceded by a huge economic crisis.
What will happen to loans and deposits in banks in case of default
According to the current legislation, the parties are exempted from obligations under a loan or deposit agreement only as a result of force majeure. I will list these circumstances.
- Natural disasters - earthquake, fire, flood.
- Social phenomena - war, terrorist act, revolution, strikes, riots.
This means that a default does not relieve lenders and borrowers from obligations. Its consequences negatively affect the economy, which destabilizes the banking sector. As a result, the probability of losing a deposit will increase, but this does not exempt the bank from obligations to pay the deposit with interest.
The same applies to people who have taken out a loan. The crisis is not a reason for evading the repayment of the loan debt. Monthly contributions of debtors are the guarantor of the stable operation of the bank.
Will there be a default in Russia in 2017-2018
In connection with the events in the world, many are interested in whether there will be a default in Russia in the near future. As you already understood, government default is the inability of the country to service external debts. The answer to the question is in this formulation.The default of the Russian Federation does not threaten
The Russian Federation, in comparison with other countries, does not have such a large external debt. According to experts, some large companies from the Russian Federation have large debts to creditors. Even if one of the firms defaults, this does not mean that the whole country will not cope with debt servicing.
The main reason for the panic is the weakening of the ruble, caused by the introduction of sanctions. As a result, the population has increased distrust of the Central Bank. However, the measures taken were justified. At the end of 2014, the cost of oil on the world market significantly decreased. Representatives of the Central Bank decided to release the national currency to free float and ceased to hold the course by wasting gold reserves.
Rumors regularly appear on the Internet that the Russian state is on the verge of default.In fact, these rumors are focused on destabilizing the situation in the country, targeting panic and lowering the trust rating.
An objective analysis of the situation highlights the factors that make default technical impossible:
- Minor external debt.
- Decent stock of gold.
- The development of new markets.
- Signing of cooperation agreements with India and China.
In the near future, the inflow of foreign capital into the country will increase, which will contribute to the beginning of a new round of economic growth. Consequently, the prospects are bright and not depressing.
In addition to rumors about a possible default, information appeared about the devaluation of the ruble in 2018-2019. That kind of rumor is unfounded. The gold and currency reserves are constantly replenished and support the national currency. Consequently, the change of banknotes in such conditions is meaningless.
Summing up, with confidence I inform you that in the near future Russia will not be in default. 2017 will not be easy, but there will be no catastrophic events in the country's economy. On the contrary, the facts indicate the beginning of economic growth.
Will there be a default in Ukraine in 2017-2018
More recently, no one guessed that the protests on the Maidan will cause the economic collapse of the largest European country.Time passed and changes in the political and economic sphere of the state manifested themselves.There is a probability of default in Ukraine
This question has no definite answer. According to the news in the press, in 2016, the default of the Ukrainian state is inevitable. If the authorities stop the war, agree with creditors and take care of the resumption of economic growth, it is possible that Ukraine will avoid this unpleasant situation.
After reviewing the economic ratings, it is clear that the size of Ukraine’s external debt relative to GDP is not the largest. At the same time, the increase in the debt body is due to the devaluation of the national currency. When the amount of debt is equal to GDP, as in the case of Ukraine, the conversation is about the proximity of default. In the United States, with similar indicators, they do not even think about it, due to the constant growth of the economy.
Ukraine's economy is tilting. The severance of ties with the Russian Federation was a blow to Moscow, but Kiev suffered a lot from it. Rapid inflation has bankrupted the population, and the war has negatively affected the reputation of the authorities.
A careful analysis of the overall picture leads to the conclusion that without changes in the economy and politics, the probability of default in Ukraine in 2017-2018 is high. Although, it is problematic to predict.For example, no one expected the Russian Federation to declare a default in 1998.
In the summer of 2015, the authorities of Greece would not be able to get out of the pit. However, they managed to find a common language with creditors. Therefore, there is no exact answer to the question in question.
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