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 the analogy with this definition is rarely held, since the concept of insolvency has a narrower interpretation. Consider further what default is. In simple terms, we will try to explain the essence of the concept.
Official terminology
Many finance professionalsknow what default means. Under this definition should be understood a violation of the payment obligation taken by the borrower to the lender. In fact, it is the inability to perform timely repayment of the debt or other terms of the contract. In a broad sense, default is any form of waiver of debt. In practice, a narrow interpretation of this concept is used. People with authority are very well aware of what default means. In a narrow sense, they understand the refusal of the central office of their debts.
Features of the procedure
Distinctive features of the default can be consideredcomparing it with bankruptcy. In the event of insolvency of the payer (corporate or private), the creditor has the right to seize the assets of the debtor. So he compensates for his losses. In many countries, bankruptcy involves a centralized process in which the settlement of all claims against an insolvent company is carried out. The arrest of property in this case is carried out in accordance with a court order. Assets are combined, and a competitive mass is formed from them, which is subsequently distributed among creditors in the order established by law. Such a procedure cannot be applied if a default is declared. This is due to the fact that the arrest of the property of the debtor in such a situation is almost 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
The state default may be:
- On bank loans.
- Under obligations in national currency.
- For debts in foreign money.
The state default on loans in national currency is announced less frequently 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 the default of a country can bepresent as a loop. At its first stage, the government receives relatively easy access to international sources of finance. They are, in particular, the IMF, the Paris Club, the Private Bank and the major bankers of developed countries. Experts of the Monetary Fund recommend that the needy authorities promise a high credit percentage. So they can attract more investors. The prospect of obtaining high profits is really very attractive capital of world lenders. 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. With the infusion of 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 on the private accounts of state officials. Sooner or later, the payout period is coming anyway. In this case, the government, as a rule, can only partially repay obligations at the expense of its own finances. To make full payments, he needs to raise funds in the foreign and domestic markets. Only a few countries are able in such conditions to stabilize or reduce their debt. As a rule, foreign debt is growing rapidly.
Second phase
В период роста экономики инвесторы рассчитывают on the real source of repayment of obligations. In these cases, lenders provide new loans to countries. But at the first manifestations of political or economic instability of investors is becoming less. At the same time the interest on the loan increases. Accordingly, the debt itself is increasing rapidly. In such circumstances, the default of the country is only a matter of time.
Financial help
IMF emergency investment can saveonly for a short time. In addition to real financial assistance, the Monetary Fund conducts a number of activities in which private capital gets the opportunity to leave the problem area. Lenders who have withdrawn their funds on time will benefit, even if the country is defaulted. They manage to make a profit on interest and as a result of the resale of debt obligations. As a result, in any case, the moment will come when no investor wants to invest in a troubled state even at very high rates. 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 performcommitments. This option is usually used by countries with large domestic debt. In fact, this measure is similar to the default on loans in national currency. In some cases, the government simultaneously declares its insolvency and conducts a devaluation.
Probability estimate
The government, unlike a private company,There are no 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. Equally important are such microeconomic indicators as the level of GDP and foreign exchange reserves, the rate of inflation. In the process of conducting such a fundamental analysis, the issue of reliability of statistical information is more acute than in assessing the reporting of corporate debtors. This is particularly pronounced in relation to transitional and developing economies.
Analysis Methods
All types of estimates of the probability of default are divided into two categories:
- Actual - these techniques allow you to calculate an objective indicator based on statistical information.
- Methods based on the market price of bonds, shares or derived financial values, by means of which a neutral assessment and a risk premium are determined.
Actual indicators count ratingagencies. The risk assessment determines the likelihood of losses that may arise from foreign investors. The higher the country's rating, the lower the risk of default. Such estimates are of great importance for foreign lenders when choosing the best areas of investment.
The ratio of export to external debt
The calculation of this indicator is considered one ofmost popular methods of analysis. The greater 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 for 5 years, sending export profits to return 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, since this will violate the system of currency and import-export operations.
Budget
His condition is also important whenanalysis of 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 allocate for servicing obligations without complicating the socio-economic situation. Since income serves as a tax to a greater extent, in order to predict the situation, it will be necessary to assess the economic situation and development prospects. After that, it is necessary to analyze the difference between the value obtained and the volume of real deductions for servicing obligations in a particular period. If it is in favor of repaying the debt, the government will have to carry out additional borrowing.
How will the default affect the state of the business sector?
The phenomenon in question will negatively affectthe economy. As for Russia, here, first of all, the value of the ruble will fall sharply relative to the price of other currencies. Many enterprises engaged in the purchase of foreign products will be forced to suspend or completely stop work.
Many are interested in what threatens default Ukraine.Currently, there is a very tense situation on its territory. Nevertheless, it is supported by the EU, including financially. The most accurate answer to the question of what threatens to default Ukraine, may experts of rating agencies. For example, according to Moody’s calculations, the crisis of 2000 was not the most negative for investors. Analysts estimate the quotes of Eurobonds, which are declared insolvent, within a month after a refusal to fulfill obligations. political and economic situation, the government is trying to fulfill its commitments.
Default for citizens
In connection with the introduction of sanctions against the Russian Federation, manyRussians are in a panic, not knowing what to do when there is a threat of crisis. As mentioned above, the refusal to service external debt will primarily affect the state of the ruble. In this regard, experts recommend getting rid of the national currency and buying something essential for it (household appliances, real estate). All that will be after the default, will hit the budget of the population. With a sharp decrease in the ruble exchange rate, consumer prices will rise. At the same time, wages may remain at the same level or even decrease. After default, there is a high risk of losing money. It is not worth worrying about those whose finances are not stored in ruble accounts. Companies purchasing goods abroad may become so insolvent that they will have to disband staff. Analysts advise people with ruble savings to invest in a more stable currency or gold. Profitable purchase of real estate. As practice shows, during the crisis, the cost of housing is at least halved. 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, the government needs to take radical measures to stabilize the socio-economic system.
