The global recession has forced many financial institutions and even nations to default on their repayments, but what exactly are economic defaults. This guide will tell you the basics of what you need to know.
What are Economic Defaults?
Basically a default is the failure to pay back a loan. In the world of finance and economics a default is when a debtor cannot meet their obligations; they may not have been able to keep to a scheduled repayment or has broken some aspect of the loan deal.
Defaults occur if the debtor is unable or unwilling to pay off their debts and can happen to all types of debt obligations such as loans, mortgages and bonds. Defaults should be distinguished from bankruptcy and insolvency.
Bankruptcy is when a legal body imposes court supervision over the debtor’s financial affairs. Insolvency is a legal term which means that a debtor is unable to repay their debts.
Types of Economic Default
There are several differing types of Economic defaults, these are:
This form of default often deals with arrears in rents, mortgages, credit cards or utility payments. Rather than dealing with nations it deals with individuals.
Debt Services Default
This occurs when the debtor has not made a scheduled payment of interest.
In the recent times of economic crisis the issue of a nation’s debt has been raised a lot. During these times a lender could engineer the restructuring of a country’s public debt. This is also called a controlled default. This strategy is often criticised as the time it takes to carry out may impact negatively on lenders and other countries.
Nation states and sovereign borrowers tend to not be punished by the law if they default on their loans. Countries like Argentina have defaulted on $1billion debts owed to the World Bank and did not occur much in the way of a punishment. In these situations the creditor and country will renegotiate the terms of the loan.
These are when a debtor can choose to default on a loan even though they are able to make payments towards paying it off. This type of default is often used In the United States for mortgage loans. It’s called ‘jingle mail’- the debtor stops repaying the loan and posts the keys back to the bank.