What is default? This word can often be heard on television, especially when it comes to a country experiencing economic difficulties. However, this term is used in a number of other areas, which we will discuss below.
In this article, we will tell you what is meant by default and what consequences it can have for citizens.
What does default mean
Translated from English, the word "default" literally means "default". Default is an economic situation characterized by the inability of the state to pay off external and internal debts due to a sharp depreciation of the national currency.
In simple terms, a default is an official declaration by the state that it stops paying for debts, usually for a long period of time. Despite this, a simple person who, for example, has delayed the payment of a loan or has not made a monthly payment, can also defaulted.
In addition to financial obligations, default may mean failure to comply with any clauses provided for in the loan agreement or the terms of the issue of securities. So, an indispensable requirement for issuing a loan to an entrepreneur is the submission of reports to the bank.
Otherwise, failure to submit the profit statement within the specified period is considered a default. This concept is characterized by several designations:
- failure to comply with debt obligations within a certain period;
- insolvency of an individual, organization or state;
- failure to meet the conditions for obtaining a loan.
Types of default situations
Economists distinguish 2 types of default - technical and conventional. A technical default is associated with temporary difficulties, when the borrower does not refuse from its obligations, but at the moment is experiencing certain difficulties.
The usual default is the insolvency of the debtor who declares himself bankrupt. That is, he does not have the money to pay off the loan, either now or in the future. It is worth noting that according to the category of the borrower, the default can be: sovereign, corporate, banking, etc.
The default can be caused by a variety of circumstances, including the economic crisis, military conflict, coup, job loss and many other factors.
Consequences of sovereign default
The insolvency of the state leads to especially grave consequences:
- the authority of the state is undermined, as a result of which cheap loans become unavailable;
- devaluation of the national currency begins, leading to inflation;
- the standard of living of the people is getting lower and lower;
- lack of sales of products leads to bankruptcy of companies and enterprises;
- unemployment rises and wages fall;
- the banking sector is suffering.
Nevertheless, the default helps to mobilize the country's reserves. Budget allocation is more efficient. Creditors, fearing to lose everything, agree to restructure debts or refuse interest altogether.
