The question about what will happen to the loans inin case of default, a sufficiently large number of people are interested, and the main reason for this is an unstable global economy. The concept of "default" evokes associations since 1998, not only among economists, but also among ordinary people. In the memories of the fall of the ruble pops up and empty shelves in stores, large queues for groceries. On the world stage over the past 20 years, in addition to Russia, three more countries had to face the phenomenon: Mexico, Argentina and Uruguay.
What is the "default" in the eyes of economists?
In the literal sense of the word default is considered to becomplete failure of any object to pay its obligations. In other words, at the state level, the country officially declares that it does not have the means to pay its debts. There is a technical modification of the phenomenon. In fact, the object is not able to pay the bills, but he does not make an official statement about this. There is a corporate and even personal format of the situation. The consequences of default are considered to be a negative phenomenon. However, as with each medal, there are positive aspects to the situation. On the one hand, one can see the collapse and total destruction of all external relations of a financial type, and on the other hand, a unique chance to begin the history of the state’s development from scratch, without mistakes and blunders.
What happens when the state refuses to pay debts?
The failure of the state to pay the debt does not affectonly on his reputation, but also leaves a negative mark on the financial rating. The specificity of the modern economy is in the practice of borrowing from almost every country with the aim of increasing income or to close the “holes” in the budget. The independence of the international lending market provides a refusal to finance a country that has a bad reputation. Loans in this situation become possible only with the provision of appropriate security. The bankrupt country is almost completely losing financial insurance.
The fall of the national currency
Many of the consequences of default are due to a sharpthe fall of the national currency. The cost of money depends on the level of trust in the state. Lower prices for the national currency lead to restrictions on the country's capabilities in the global market. The state becomes "poor" against the background of other countries. In particular, reducing the value of the national currency three times leads to a reduction in the volume of purchases by the same amount. An underdeveloped industry can lead to food shortages in the country. In parallel, there is a drop in income among the population and a decrease in the standard of living. The work of companies based on the international component (components, financing) becomes unprofitable. The reduction in the number of jobs leads to a general deterioration of the situation in the country.
Banking system and policy
Considering the question of what default means isnote negative developments in the banking sector. The state financial system is being depleted. The opportunity to use foreign loans disappears, the debt grows. Bankruptcy of most financial institutions becomes inevitable. Each client of the bank loses its funds, since all accounts are frozen. Due to the fact that the economic growth of companies is impossible without providing loans, commercial activity in the country stops. It is almost impossible to take a bank loan, since the latter has a very limited money limit. Due to the lack of confidence in the financial system in the country, the level of trust in politicians falls. The solution of important economic issues at the international level is significantly complicated.
What is good about defaults?
When a crisis comes, default is in its prime -this signals that the country has collected a huge amount of money in debt and is now unable to pay even interest on it. There are not enough funds to solve the dominant state tasks, since the bulk of the budget is spent on debt servicing. When a country loses external support, it directs all resources to solve internal problems, previously under-funded sectors receive material support. Experts agree that, thanks to the default, the level of competitiveness of the country's economy and domestic production increases several times. Since wages and the purchase of goods are made in a depreciated currency, there is a reduction in the cost of goods and services for the external buyer. The fall in prices for goods and services leads to the formation of demand, to an increase in the number of orders, to the intensification of previously "dormant" capacities.
Complete coup
It happens that during the default you can not getonly a bank loan at a lower interest rate, as banks try to attract customers by all available means, the phenomenon leads to a complete revolution in the country's economy. Isolation from external financing and imports brings the country to a new, safe standard of living. Domestic consumption and sources of financing are prevailing. The fall of the economy pushes out of the market inflated economic sectors. Phenomena, when an enterprise’s shares are much higher than their real price, are completely eliminated. Real values gain real value. All financial distortions are eliminated.
Debt reduction
Many are interested in what will happen to the loans incase of default. Nothing bad will happen. If we consider the situation at the state level, the country gets a unique chance and weighty grounds for starting negotiations on restructuring and reducing debts. Lenders, perceiving and evaluating the picture of what is happening, quite often make concessions, since there is simply no other way to return their funds from them. It can be said that a default is a great opportunity for a country to adapt its economic model to the realities of the modern world.
What will happen to loans in case of default and what can you not even count on?
Many people just do not understand that default isno chance not to pay the debt to the bank. A state that has officially declared its inability to pay debts is not a basis for refusing to pay debts to a financial institution. Borrowers, despite the situation in the state, are obliged to continue to fulfill their obligations to the bank. Moreover, any breach of contract or minimum delay will be punished with the utmost severity. It is the funds that were issued on the eve of the borrowers, and act for the bank financial insurance pillow during times of crisis. If during periods of stable development of the country's economy, the delay was accompanied by simple telephone calls and warnings, the bank will strictly demand that the client fulfill his obligations, up to the withdrawal of security.
What do borrowers do?
Percentage of people who are usersloans are quite large. It is a common practice when families bear a large financial burden, when the level of income is much less than the existing debt. With a stable economic development of the country, such a debt load is still maintained, but with a catastrophic fall in currency, it becomes an unbearable burden. In a situation, the main thing is not to delay payments and not to wait for the weather from the sea. It is worth immediately contacting a financial institution with a request for a refinancing or restructuring. As practice has shown, financial institutions make concessions, as in a situation with external lenders for them a flexible partnership becomes the only chance to stay afloat. It is through the return of debtors' funds that it is possible to fulfill obligations to investors and not to leave the financial market, retaining the license and avoiding liquidation.
What do banks have and are not entitled to?
Considering the question of what will bewith loans in case of default, you should not hope that banks will forgive all their debtors. Rather, on the contrary, measures aimed at returning debts will only be tightened. Borrowers should be aware that no financial institution has the right to violate the terms of the contract. Loans during a default, in particular a mortgage or car loans, cannot be changed. The Bank has no authority to change the terms of the partnership and to increase interest on payments. An exception may be situations where these items are provided for in the partnership documents. If illegal measures are taken against the borrower or require payment at an excessive interest rate from him, he has the right to file a complaint with consumer services. These moments in default are controlled by the state especially tightly.
What loans are common at default, and which are the most problematic?
Having dealt with the question of what the default threatensthe country and individuals should focus on the area related to the availability of credit. The lack of funds in the country and in most financial institutions does not preclude the possibility of taking loans. Another thing - it is unprofitable conditions, which simply have to agree. In periods of bankruptcy at almost all levels in the country, consumer loans can be forgotten. A small percentage of the use of money against the background of the crisis will not save the banks in any way, since it simply will not block the percentage of defaults. Considering the question of how default will affect loans, we can talk about the popularization of such areas as express lending. It is characterized by a fairly large reserve of funds, since the average interest rate on this banking product is about 50%. High rates are compensated by a simple loan application and a minimum package of documentation. Financial institutions offering this type of loan are able to easily survive about 20% of non-repayment of funds. In times of crisis, it is better to try to avoid loan processing, as the bank is unlikely to provide favorable partnership terms. After the crisis has passed, the debt will have to be repaid on previously accepted conditions, which would be very problematic to call rational.
