In the light of the difficult situation in the economy, many are often wondering what default is? How can he influence the well-being of ordinary citizens, and the future of the whole country? What is a technical default country?
For many citizens of Russia, the word "default" is known not to first. The strongest economic and social crisis of 1998 clearly showed what consequences the inability of the state repay their debt obligations.
What is default - simple words
In the literal translation from English, the word "default" means the inability of the borrower to fulfill the obligations previously assumed.
In particular, the state or company is unable to fully pay off their debt, or cannot provide interest on it.
Views
Allocate two key types of default - technical and usual.
Normal
Simple default implies official recognition of the debtor (states or companies) inability to fulfill debt obligations to creditors on the absence of money.
In the case of announcement of such a default, it creates a team of temporary governors (crisis), whose main task is to analyze and develop a strategy for further actions of the company, for example, the procedure for eliminating the company and selling its assets, the distribution of reversed funds between creditors.
If the state is recognized as insolvent, this problem is solved already at the international level, with the active participation of creditors, international financial organizations. For example, the International Monetary Fund.
An ordinary default can be cross and sovereign. Cross default is characterized by consistent late debt obligations. In the case of the onset of sovereign bankruptcy, the state cannot carry out any more internal debt obligations or external.
Technical default - what is it?
A similar type of bankruptcy occurs due to technical errors.
For example, the firm provided an incomplete package of documents, the borrower refused to pay interest accrued on debt obligations, or a simple failure in the payment system.
Explaining simple words, the technical default is any violation of a debt agreement or a technical deficiency in the physical possibility of the borrower to fulfill its obligations to creditors.
The consequences of the technical default can be rapidly leveled. In the event of a long time of non-payment of interest, the lender has the right to apply to a legislative basis, identify the reasons for non-payment and demand from the borrower to fulfill all its obligations.
Causes of the offensive
The main causes, one way or another contributing to the offensive of the default, are:
- crisis position of the state economy (company);
- unbalanced budget of the company (states);
- a significant reduction in revenue received;
- unforeseen circumstances;
- changing the political regime of the state, and the refusal of the new government to fulfill the obligations of the previous government.
The decline in income level, as well as the critical imbalance of the budget occurs due to the previously inflated forecast estimates, or due to the rapidly increased costs, previously unforeseen.
Companies may not receive part of income for many reasons, among them:
- increased competition;
- reduction of consumer demand;
- an increase in the cost of products;
- lack of a developed firm development strategy;
- top management errors.
In the event of a state, revenue decreases may be a consequence of tax non-payment by legal entities and individuals, as well as the fall in the cost of exported raw materials (price increases in case of import-oriented economy).
Another reason for the onset of default can serve as a recession in the global economy. It is manifested in the outflow of capital, a decrease in the level of real incomes of the population, an increase in consumer prices. All this, one way or another, has a negative impact on both the state and on a separate company, leading them to the predefolitical state.
The cash rupture in the enterprise is most often a consequence of serious errors in the calculations, as a result of which the revenue part does not cover the operating expenses of the company. In order to deal with the reasons for this process, you need to understand. And also read advice on how to avoid bankruptcy in this situation.
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Effects
As any other economic phenomenon, the bankruptcy of the state (default) carries not only negative consequences, but in some cases positive.
Positive
- In the case of a significant level of debt, allows you to send money previously left from the country to solve internal problems.
- Increasing the competitiveness of domestic production and the entire economy in general in the international market.
- Full restructuring of the country's economy. Exit to the safe level of operation, and ensuring exclusively internal sources of financing.
- Earlier "Dool sectors of the economy" disappear. The role of real goods and production increases.
- The ability to negotiate with creditors on more favorable terms.
Negative
- Significant devaluation of national currency and reducing the purchasing power of consumers.
- The fall in the country's financial rating in the international capital market. Inability to make new borrowing. The country becomes "outcast" on the financial site of the world.
- Stop larger production.
- The crisis of the banking system.
- Numerous political problems.
Historical examples
The history of the financial market knows not one major default, one way or another affecting all the areas of life.
One of the bright examples when the technical default was the initial stage in the increasing chain of strong financial turmoil and the full failure of the country from the payment of debt is the Argentine crisis of 2001.
It is considered one of the most difficult economic shocks in history.
Initially, due to the ultra-high level of debt (130 billion US dollars), the Argentina authorities decided to restructure.
New debt liabilities have been issued with a smaller return and a more distant repayment date. New bonds were exchanged for old obligations.
However, this decision was not saved by the state budget, and the government decided, which subsequently had a critical impact on the country's economy - for repayment of debts, the money of private pension funds were used, which, in fact, meant their confiscation.
Mass riots during the Argentine Crisis of 2001
After in Argentina, all budget and currency transactions were suspended, mass riots began, and the President of Argentina announced the largest bankruptcy in history - 132 billion dollars of external debt.
The result of the economic crisis in Argentina:
- During the day, the cost of electricity increased several times;
- For several days, the country completely lost electricity;
- Unprecedented growth of violence and looting;
- 54 percent of the population of Argentina turned out to be beyond poverty.
The level of production fell fifty percent, and more than 700 thousand people lost work during the first week.
But it is worth noting that default does not always have such negative consequences. The example is a vivid example - bankruptcy of Mexico and default of Icelandic banks in 2008. Often, such a situation helps to determine the weaknesses of the economy, and find the most effective ways to eliminate them.
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