What Is a Sovereign Default?

Sovereign default refers to the situation in which a government cannot repay the principal and interest of its borrowings on external guarantees, such as debt restructuring; the current principal and interest have not been paid as scheduled; the total debt exceeds the IMF loan agreement The highest limit stipulated, sovereign defaults have seriously affected the reputation of a country as an international borrower, and it has become more difficult to enter the international capital market to realize financing.

Sovereign breach

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Sovereign default refers to the situation in which a government cannot repay the principal and interest of its borrowings on external guarantees, such as debt restructuring; the current principal and interest have not been paid as scheduled; the total debt exceeds the IMF loan agreement The highest limit stipulated, sovereign defaults have seriously affected the reputation of a country as an international borrower, and it has become more difficult to enter the international capital market to realize financing.

Overview

2. In the international debt crisis that broke out in the 1980s, many debtor countries experienced a lost decade. Paying off debts in arrears does not mean that they can get more loans in the future. If countries simply borrow more More and more money is not repaid, then when the world's real interest rate exceeds the long-term real growth rate of the domestic economy, the debt level relative to income is the most important big bang, which is the so-called "Ponzi scheme".

3. Debt default also affects the enthusiasm of foreign direct investment. For a country with multiple sovereign defaults, the time and risks that foreign companies need to consider before investing are obviously more complicated. In the 1960s and 1970s, foreign companies investing in defaulting countries often had to face the dilemma of plant and equipment being seized. Chile in 1977 seized the copper mines of American companies. In the early 1970s, the shares of foreign oil companies were also The OPEC countries are nationalized.

4. Domestic debt defaults distort banks and the financial system, and the cost of domestic debt default solutions remains huge. In addition to having a huge impact on the overall credit system of the society, the issuance of large numbers of banknotes, high and unpredictable inflation and the strengthening of financial restraints will also distort the banking system and the financial sector. And after the crisis, they will face currency devaluation, and double tightening of finances and currencies in economic policy will cast a shadow on the prosperity of the domestic economy.