The country's default. Causes and consequences

Not everyone knows what a default is. In simple language this concept is described in popular publications. A synonym for this word is bankruptcy. But usually an analogy with this definition is rarely done, since the concept of insolvency has a narrower interpretation. Let's consider further, that such a default. In a simple language we try to explain the essence of the concept.

Official terminology

Many specialists working in the field of finance know what it means to default. This definition should be understood as a violation of the payment obligation accepted by the borrower, before the creditor. In fact, this is the inability to perform timely repayment of debt or other terms of the contract. In a broad sense, a default is any form of renunciation of a debt obligation. In practice, a narrow interpretation of this concept is used. People with power are very aware of what default means. In the narrow sense, it is understood as the refusal of the central administrative apparatus from its debts.

Features of the procedure

Distinctive features of default can be considered, comparing it with bankruptcy. In case of insolvency of the payer (corporate or private), the creditor has the right to arrest the assets of the debtor. So he compensates for his losses. In many countries, bankruptcy involves a centralized process, during which all claims to the insolvent company are settled. The seizure of property is carried out in accordance with the judicial decision. Assets are combined, and from them a competitive mass is formed, which is subsequently distributed among creditors in accordance with the order established by law. Such a procedure can not be applied if a country's default is declared. This is due to the fact that the arrest of the debtor's property in this situation is practically impossible. In the best case, creditors will be able to freeze assets of the state that are outside its territory, including real estate and money on foreign accounts.

Classification

A government default may be:

1. On bank loans.
2. For obligations in national currency.
3. On debts in foreign money.

The state defaults on loans in national currency are announced less often than on foreign loans. This is due to the fact that the government can repay domestic obligations by issuing new banknotes.

The essence of the process

The mechanism that causes a country's default, can be presented in the form of a cycle. At its first stage, the government receives relatively easy access to international sources of finance. They, in particular, are the IMF, the Paris Club, the Private Bank and the big bankers of the developed countries. Experts of the Monetary Fund recommend that the needy authorities promise a high loan interest. So they can attract more investors. The prospect of earning high profits really attracts the capitals of world creditors. They easily transfer funds in search of the most profitable short-term investment. Their means they invest in the purchase of securities issued by states. With the injection of large amounts of funds, investors usually receive a short-term positive result. This convinces the national elite that it has chosen the right path of development. In many cases, in practice, a significant share of borrowed capital does not reach the real sector of the economy, but settles on private accounts of state officials. Sooner or later, the term of payment is still coming. In this case, the government, as a rule, can only partially pay off the obligations at the expense of its own finances. To make full payments it needs to raise funds in the external and internal markets. Only a few countries are able in such conditions to stabilize or reduce their arrears. As a rule, external debt is growing at a rapid pace.

Second phase

In the period of economic growth, investors are counting on a real source of repayment of obligations. In these cases, lenders provide new loans to countries. But with the first manifestations of political or economic instability, investors are becoming less. At the same time, the interest on the loan is increasing. Accordingly, the debt itself is increasing at a rapid pace. In such circumstances, the country's default is only a matter of time.

Financial aid

Emergency investment of IMF funds can save only for a short time. In addition to real financial assistance, the Monetary Fund conducts a number of activities, during which private capital gets the opportunity to leave the problem zone. Lenders, who withdrew their funds on time, will benefit, even if the country defaults. They manage to get profit on interest and as a result of resale of debt obligations. As a result, in any case, there will come a time when no investor wants to invest in a problem state even at very high tariffs. In connection with the lack of funds for refinancing, the government is forced to declare a default.

Devaluation

It is often used instead of refusing to fulfill obligations. This option is usually used by countries with a large internal debt. In fact, this measure is similar to the default on loans in national currency. In some cases, the government declares both its insolvency and devalues.

Probability evaluation

The government, unlike a private company, does not have financial statements that could be analyzed. On a national scale, it is necessary to assess the state of the entire economic system. Particular attention should be paid to the ratio of liabilities in foreign and national currency, the amount of debt to the value of annual exports. Importantly, such microeconomic indicators as the level of GDP and gold and currency reserves, the rate of inflation. In the process of carrying out such a fundamental analysis, the reliability of statistical information is more acute than in assessing the reporting of corporate debtors. This is particularly evident in relation to countries with a transition and developing economy.

Methods of analysis

All types of assessment of the probability of default are divided into two categories:

1. Topical - these techniques allow you to calculate the objective indicator based on statistical information.
2. Methods based on the market price of bonds, shares or derivative financial values, through which a neutral valuation and a risk premium are determined.

Current indicators are calculated by rating agencies. Risk assessment determines the likelihood of losses that foreign investors may have. The higher the country's rating, the lower the risk of default. Such assessments are of great importance for foreign creditors when choosing the optimal investment directions.

Ratio of export volume to external debt

Calculation of this indicator is considered one of the most popular methods of analysis. The more this ratio is, the easier it is for the debtor to repay the obligations. There are various estimates of the criticality of this quantity, but a level of 20% or more is considered acceptable. However, experts do not characterize this indicator as optimal. With an indicator of 20%, the state will be able to fulfill all obligations in 5 years, sending export profits for the return of foreign loans. But since in most cases the income of private companies is taken into account, the government will have to expropriate it completely. In such conditions, the preservation of exports at the same level for five years is unlikely. Also, the state will not be able to fully repurchase the proceeds, as this will violate the system of currency and import-export transactions.

Budget

His condition is also of great importance in analyzing the solvency of the country. In particular, the ratio of income items to the amount of debt is taken into account. In this case, it is necessary to establish what part of its budget the government will be able to send to service obligations, without complicating the socio-economic situation. Since income acts as a tax to a greater extent, it is necessary to assess the economic state and development prospects for forecasting the situation. After this, it is necessary to analyze the difference between the received value and the volume of real deductions for servicing obligations in a given period. If it is in favor of paying off the debt, then the government will have to make additional borrowing.

How will the default affect the state of the economic sector?

This phenomenon will negatively affect the economy. As for Russia, here, first of all, the value of the ruble will drop sharply relative to the price of other currencies. Many enterprises involved in the purchase of foreign products will have to suspend or completely stop working.

Many are interested in what Ukraine is threatening to default. At present, its territory is very tense. Nevertheless, it is supported by the EU, including financially. The most accurate answer to the question, what threatens to default Ukraine, experts of rating agencies can. For example, according to Moody's calculations, the crisis situation of 2000 was not the most negative for investors. Analysts estimate the quotes of Eurobonds, on which it is declared insolvency, within a month after the refusal to fulfill the obligations. In the near future, the default of the hryvnia is not expected. Despite the instability of the political and economic situation, the government is trying to fulfill its obligations.

Default for citizens

In connection with the introduction of sanctions against the Russian Federation, many Russians are in panic, not knowing what to do in case of a crisis. As was said above, the refusal to service external debt will primarily affect the state of the ruble. In this regard, experts recommend to get rid of the national currency and buy something significant (household appliances, real estate). All that will be after the default, will hit hard on the budget of the population. With a sharp decrease in the ruble exchange rate, prices for consumer goods will rise. Salaries can remain at the same level or even decline. After default, the risk of losing cash savings is high. Experiencing is not particularly worth it for those who do not have their finances stored on ruble accounts. Companies that purchased goods abroad can become insolvent so that they have to dissolve their staff. People who have ruble savings, analysts are advised to invest in a more stable currency or gold. It is profitable to buy real estate. As practice shows, during the crisis, the cost of housing is reduced at least twice. One of the most popular ways to save your money is still to invest in foreign currency (dollar or euro). If there is a threat of such a crisis, the government needs to take radical measures to stabilize the socio-economic system.