Not everyone knows what a default is. In simple terms, this concept is described in popular publications. The synonym for this word is bankruptcy. But usually an analogy with this definition is rarely drawn, since the concept of insolvency has a narrower interpretation. Let's take a look at what default is. In a simple language, we will try to explain the essence of the concept.
Official terminology
Many financial professionals know what default means. This definition should be understood as a violation of the payment obligation assumed by the borrower to the creditor. In fact, this is the inability to fulfill the timely repayment of the debt or other terms of the contract. In a broad sense, a default is any form of default on a debt obligation. In practice, a narrow interpretation of this concept is used. The people in power have a very good idea of what default means. In a narrow sense, it is understood as the refusal of the central administration from its debts.
Features of the procedure
Distinctive features of default can be seen by comparing it withbankruptcy. In case of insolvency of the payer (corporate or private), the creditor has the right to seize the debtor's assets. So he makes up for his losses. In many countries bankruptcy involves a centralized process in which all claims against the insolvent company are settled. The seizure of property is carried out in accordance with a court order. Assets are combined, and from them the bankruptcy estate is formed, which is subsequently distributed among creditors in the order established by law. Such a procedure cannot be applied if a country has declared a default. This is due to the fact that the seizure of the debtor's property in such a situation is practically impossible. In the best case, creditors will be able to freeze state assets that are outside its territory, including real estate and money in foreign accounts.
Classification
State default can be:
- On bank loans.
- For liabilities in national currency.
- On debts in foreign money.
State default on loans in national currency is announced less frequently than on external loans. This is due to the fact that the government can pay off domestic obligations by issuing new banknotes.
The essence of the process
The mechanism that causes a country to default can be represented as a cycle. At its first stage, the government gets relatively easy access to international sources of finance. They, in particular,the IMF, the Paris Club, the Private Bank and major bankers from developed countries are speaking. Monetary Fund experts recommend that the authorities in need promise high interest rates. So they can attract more investors. The prospect of high profits is indeed very attractive to the capital of world creditors. They easily transfer funds in search of the most profitable short-term investment. They invest their money in the purchase of securities issued by states. When injecting large amounts of funds, investors usually get 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 proportion of borrowed capital does not reach the real sector of the economy, but settles in the private accounts of government officials. Sooner or later, the payment deadline will come anyway. In this case, the government, as a rule, can only partially repay the obligations from its own finances. To make full payments, he needs to raise funds in the foreign and domestic markets. Only a few countries are able to stabilize or reduce their debt under such conditions. As a rule, external debt grows at a rapid pace.
Second stage
During the period of economic growth, investors rely on a real source of repayment of obligations. In these cases, lenders provide countries with new loans. But at the first manifestations of political or economic instability, there are fewer and fewer investors. At the same time, the percentagecredit increases. Accordingly, the debt itself is increasing at a rapid pace. Under such conditions, the country's default is only a matter of time.
Financial assistance
IMF's emergency investment can only save a short time. In addition to real financial assistance, the Monetary Fund carries out a number of activities, during which private capital gets the opportunity to leave the problem zone. Lenders who withdraw their funds on time will stand to gain even if the country defaults. They manage to make a profit on interest and as a result of the resale of debt. As a result, in any case, there will come a time when not a single investor wants to invest in a troubled state, even at very high rates. Due to the lack of funds for refinancing, the government is forced to default.
Devaluation
It is often used as a substitute for refusing to fulfill obligations. This option is usually used by countries with large domestic debt. In fact, this measure is similar to the default on loans in the national currency. In some cases, the government simultaneously declares its insolvency and devalues.
Probability estimate
The government, unlike a private company, has no financial statements to analyze. 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. Of no small importance are such microeconomic indicators as the level of GDP and gold and foreign exchange reserves, and the rate of inflation. In the process of conducting such a fundamental analysis, the issue of the reliability of statistical information is more acute than in assessing the reporting of corporate debtors. This is especially clear in relation to states with economies in transition and developing.
Analysis methods
All types of estimation of the probability of default are divided into two categories:
- Relevant - these techniques allow you to calculate an objective indicator based on statistical information.
- Methods based on the market price of bonds, stocks or financial derivatives that determine a neutral valuation and risk premium.
Actual indicators are calculated by rating agencies. The risk assessment determines the probability of losses that may occur to foreign investors. The higher the country's rating, the lower the risk of default. Such assessments are of great importance for foreign creditors when choosing the best directions for investing funds.
Export volume to external debt ratio
The calculation of this indicator is considered one of the most popular methods of analysis. The larger this ratio, the easier it is for the debtor to repay obligations. There are different estimates of the criticality of this value, 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 by sending export profits to repay foreign loans. But since in most cases the income of private companies is taken into account, the government will be forced 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 redeem the proceeds, as this will disrupt the system of foreign exchange and import-export operations.
Budget
His condition is also of great importance when analyzing the country's solvency. In particular, the ratio of income items to the amount of debt is taken into account. In this case, it is necessary to determine what part of its budget the government will be able to allocate to servicing obligations without complicating the socio-economic situation. Since income acts as a tax to a greater extent, in order to predict the situation, it will be necessary to assess the economic state and development prospects. After that, it is necessary to analyze the difference between the obtained value and the volume of real deductions for servicing obligations in a particular period. If it is in favor of debt repayment, then the government will have to carry out additional borrowing.
How will the default affect the state of the economic sector?
The phenomenon under consideration will have a negative impact on 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 companies involved inpurchase of foreign products, will be forced to suspend or completely stop work.
Many are wondering what the default is for Ukraine. At present, the situation in its territory is very tense. Nevertheless, it is supported by the EU, including in financial terms. Experts of rating agencies can most accurately answer the question of what the default threatens Ukraine with. For example, according to Moody's calculations, the 2000 crisis was not the most negative for investors. Analysts evaluate the quotes of eurobonds that are declared insolvent within a month after the refusal to fulfill 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 imposition of sanctions against the Russian Federation, many Russians are in a panic, not knowing what to do with the threat of a crisis. As mentioned above, the refusal to service the external debt will primarily affect the state of the ruble. In this regard, experts recommend getting rid of the national currency and buying something significant with it (household appliances, real estate). Everything that happens after the default will hit the population's budget hard. With a sharp depreciation of the ruble, prices for consumer goods will rise. In this case, salaries may remain at the same level or even decrease. After a default, the risk of losing money savings is high. It is not particularly worth worrying for those whose finances are not stored in rublesaccounts. Companies that purchase goods from abroad may become so insolvent that they have to lay off their staff. Analysts advise people who have ruble savings to invest in a more stable currency or gold. Favorable purchase of real estate. As practice shows, during a crisis, the cost of housing is reduced by at least half. One of the most popular ways to save your money is still considered to be investing in foreign currency (dollar or euro). With the threat of such a crisis situation, the government needs to take radical measures to stabilize the socio-economic system.
