We explain what a default is and how governments act in this type of situation. Also, what are economic crises.
What is Default?
Default, which in English has multiple meanings, refers to a default, a default and in turn, to be in a situation of default, etc. It is an Anglicism that spread to all Spanish-speaking countries.
Default is the situation faced by a default due to lack of liquidity. It has very serious consequences for the debtor, since it can involve from the freezing of assets to brutal falls in the international market if the actor is the Condition.
It is important to differentiate default from bankruptcy or insolvency, since the main characteristic of default is the lack of liquidity to make the payment, which does not imply that you do not have other means to do so (such as real estate, for example).
You can enter into default with any type of debt taken, either with bonds, loans or even mortgages.
The default and governments
It is very common in the different governments taking loans to the international market to take different measures in a country or region or, in the worst case, to pay a previous debt.
These usually have an interest rate that in many cases can be disproportionate, but they must take them so as not to enter into a strong recession. This causes a country's indebtedness to grow, forming what is known as "external debt" or "sovereign debt."
This has a strong impact on regional economies, conditioning all governments that take office and significantly reducing their scope for action. Debt reduction is seen as one of the best steps a person can take economy.
The crises
The default has existed throughout capitalist history in different forms and with greater or lesser levels of appearance on the scene. In recent years it has been more noticeable, due to the crisis that the United States is going through, Europe and the constantly beaten Latin America.
Historically, different organisms such as the International Monetary Fund, better known as the IMF, the World Bank or large financial institutions are in charge of "rescuing" countries in situations of economic crisis through long-term credits.
This is a subject of strong debate, since usually the conditions and terms together with the interests are not very favorable and condemn entire generations.
Such is the case of Russia and Ukraine in 1998, the crisis of some Latin American countries such as Argentina and Uruguay in 2001, or the recent crisis of 2008 that hit Europe and the United States hard, with Greece and Spain being the countries most affected by these situations.
Usually, default cases are resolved through negotiations between the parties, in which it is established how the assets will be liquidated so that the debt is paid off. This has particularities in sovereign debts, since they are rarely the result of negotiation with a single financial entity, making it impossible to finalize the debt in one payment.
Added to this are the high costs and the crisis situation that the countries are going through at that time, having to accept new conditions for the fulfillment of their obligations.
On many occasions, States opt for a "selective default." This has a double connotation:
- Cessation of payments is a measure that States choose to take, even if they never wish to do so, since as we said in the first measure it is a "contempt" or "non-compliance".
- The State can choose to which part of the debtors to pay, generally opting for the external sectors that exert the greatest pressure in the international market.
As we can see, default is a very serious problem that entities or governments can go through, and that can only be resolved by a new agreement between the parties.