Is the default technical - is it the end or only the stimulation to a change in the economic course?

In financial terms, a default is the inability of a subject to respond to its obligations. Since it is bad both for the borrower himself and for the creditor, he is tried in every possible way to prevent it. A technical default is what happened, for example, in the summer in Greece. Its main difference from the usual is the hope of a happy outcome in the future. If we say that this is a technical default, in a simple language, then it represents a situation where the borrower, although unable to timely respond to its obligations, but proposes to do so in some perspective. But there are many nuances about which this article will be discussed.

general information

A default is an inability to repay borrowed money in time to a lender or continue to regularly pay interest. For example, a person took a house in a mortgage, and it turned out to be an unbearable burden. Suppose he declares a technical default. What is it in simple words? When this person, realizing the impossibility of his burden at this particular moment in time, asks for a postponement from the bank that provided the loan for the house. A similar situation can occur with any commercial organization or state. Default means that they can no longer meet their obligations. For example, they can not pay bonds issued at the time for capital increase. A technical default is a temporary situation that only threatens to degenerate into a catastrophe. It often comes against the will of the borrower. But both sides still hope for its favorable resolution.

Types of default

The most sensational case of recent bankruptcy is the fate that befell the bank Lehman Brothers. The private default of this company was due to its inability to pay 600 billion US dollars to its creditors. Another well-known case occurred with Greece. Sovereign default in this country occurred in March 2012. The amount of debt at that time was 138 billion US dollars. In the summer of 2015, a technical default was declared. This means that Greece was not able to cope with the economic situation in the country and demanded that the IMF write off part of the monetary obligations.

Differences in insolvency

Before proceeding to the story of what a technical default is, in plain language, one must understand the terminology. It is important to understand the difference between two states - insolvency and bankruptcy. Default essentially means a situation where the borrower did not pay the loan when it was supposed to do so. It has two main types: technical and conventional. About a number of forms that he can take, we'll talk further. Insolvency and bankruptcy are legal terms. The first means that the borrower is in a situation where he can not answer for his obligations.

Features of bankruptcy

Insolvency precedes default. The situation is already being realized, but the negative outcome has not yet come. A technical default is a more joyful option when the possibility of paying off the debt is still being considered, but is postponed for the future. In this case, the borrower and the lender have some prerequisites to consider that the economic state of the former has good chances to improve. And, finally, bankruptcy. It is also a legal term. It means that there are legitimate grounds for establishing judicial supervision over the financial affairs of an insolvent entity.

Technical default: what is it in simple words?

We have already dealt with the basic terminology, now it's time for this article of our article. There are two kinds of default: debt servicing and technical. The first, as we have already found out, comes at a time when the borrower can not implement the planned payment due to its own financial problems. Technical default means that the agreement is violated. Affirmative obligations require the firm to maintain a certain level of capital or financial performance. The most common violations are the conditions of the share of retained earnings, short-term liquidity and debt servicing. Negative obligations are conditions in contracts that restrict or prohibit the firm certain actions (for example, sale of an asset, payment of dividends). In most agreements there is an item according to which insolvency for any other debt automatically leads to default on all the others.

Consequences of technical default

As we have already explained, insolvency and bankruptcies are links in one chain. But what is the threat of a technical default? After all, it seems that the country has real chances to get out of the current economic situation. But rumors about a possible real default start to hurt all the indicator. First of all, the investment climate is deteriorating . And this leads to a decrease in all kinds of ratings, which draw attention to entrepreneurs with free monetary resources. Then follows a collapse in the financial and foreign exchange markets. And who can trust the state, which is almost bankrupt? Therefore, so often a technical default develops into an ordinary sovereign one. But unlike the latter, there is still hope for the recovery of the economy. If external creditors agree to write off part of the debt, restructure and postpone the remainder of the debt, it can help the whole world once again begin to trust the state. But a happy future still depends on the competent economic policy of the national government.