In finance, default is called inability.subject to meet its obligations. Since he is bad for both the borrower and the lender, they are trying to prevent him in every possible way. The technical default is what, for example, happened in the summer in Greece. Its main difference from the usual is the hope of a happy outcome in the future. If we say that such a technical default, in simple terms, it represents a situation where the borrower, though unable to respond in a timely manner for his obligations, but assumes to do so in a certain perspective. But there are many nuances that are discussed in this article.
general information
Default is the inability to repay borrowed on time.money to the lender or continue to pay interest. For example, a man took a house in a mortgage, and it turned out to be an unbearable burden. Suppose he declares a technical default. What is it in simple words? When this person, realizing the inadequacy of his burden at this particular moment in time, asks for a delay from the bank that provided the loan for the house. A similar situation can occur with any commercial organization or government. Default means that they can no longer be liable for their obligations. For example, they cannot pay bonds issued in time to increase capital. Technical default is a temporary situation that only threatens to develop into a catastrophe. It often comes against the will of the borrower. But both sides still hope for its favorable resolution.
Types of default
The most sensational case of the recent bankruptcy -this is the fate that befell the bank of Lehman Brothers. The private default of this company was due to its inability to pay US $ 600 billion to its creditors. Another famous incident occurred with Greece. The sovereign default in this country occurred in March 2012. The amount of debt at that time was 138 billion US dollars. In the summer of 2015, a technical default was declared. This means that Greece was unable to cope with the economic situation in the country and demanded that the IMF write off part of its liabilities.
Insolvency Differences
Before turning to the story of whattechnical default, in simple terms, you need to understand the terminology. It is important to understand the difference between the two states - insolvency and bankruptcy. Default essentially means a situation where the borrower did not repay the loan, when he had to do it. It has two main types: technical and normal. On a number of forms that it can take, we will talk further. Insolvency and bankruptcy are legal terms. The first means that the borrower is in a situation where he can not answer for their obligations.
Bankruptcy Features
Insolvency precedes default.The situation is already being realized, but a negative outcome has not yet come. A technical default is a more joyful option, when the possibility of debt repayment is still being considered, but is postponed for the future. In this case, the borrower and the lender have some prerequisites to assume that the economic condition of the first has good chances to improve. And finally, bankruptcy. This is also a legal term. It means that there are legal grounds for establishing judicial review of the financial affairs of an insolvent entity.
Technical default: what is it in simple terms?
We have already dealt with the basic terminologyNow it's time for the real subject of our article. There are two types of default: debt service and technical. The first, as we have already found out, comes at a time when the borrower cannot make a scheduled payment due to his own financial problems. Technical default means that the clause of the agreement is violated. Affirmative obligations require a firm to maintain a certain level of capital or financial performance. The most common are violations of the share of retained earnings, short-term liquidity and debt service. Negative obligations are terms in contracts that restrict or prohibit a firm from taking certain actions (for example, selling an asset, paying dividends). In most agreements, there is a clause according to which insolvency on any other debt automatically leads to default on all others.
Consequences of a technical default
Как мы уже выяснили, неплатежеспособность и Bankruptcies are links in a single chain. But what threatens the technical default? After all, it seems that the country has real chances to get out of the current economic situation. But rumors of a possible present default begin to harm the whole indicator. First of all, the investment climate is deteriorating. And this leads to a decrease in various ratings, which are paid attention to by businessmen with free monetary resources. This is followed by a collapse in the financial and currency markets. And who can trust a state that is almost bankrupt? Therefore, so often the technical default develops into the usual sovereign. But unlike the latter, there are still hopes for the recovery of the economy. If external creditors agree to write off part of the debt, restructure and defer the remaining part of the debt, this can help the whole world to begin to trust the state again. But a happy future still depends on the competent economic policies of the national government.
