Worrying regarding the defaults on sovereign debts disclosed by the “Fitch International” credit rating agency, which included Belarus, Lebanon, Ghana, Sri Lanka and Zambia, bringing the number to 14 defaults since 2020.
The problem of default is that it increases the troubles of the troubled state, although in principle it displaces them from paying the debt service or its principal, because default damages the country’s reputation in global banking circles and makes it difficult for the state to borrow from abroad, and if it can borrow, it will be at a cost. High interest. Rather, the state will face difficulties in borrowing even at the domestic level, especially long-term borrowing in the local currency, so it will be forced to borrow locally in the short term, and the well-known risks that this entails.
Few countries can borrow in their local currency at the international level, due to the difficulty of convincing international investors to accept bonds issued in a local currency that are subject to many vibrations, and this is the case in most countries, with the exception of a few major countries with diversified economies and a strong, cohesive exchange rate, the so-called hard currency .
In the case of borrowing in the local currency, there is ample room for the state to ease the debt burden without having to declare default, by virtue of the fact that the state is sovereign and its currency is independent, so it can print more money or adjust the exchange rate if it is linked to another currency, or float the currency that necessarily deteriorates. Spending it, the state can pay off the debt at a lower cost.
However, borrowing in another currency, whether locally or internationally, involves great challenges for the state, and this is what happened in a number of cases, including Greece in 2012, whose debts before declaring default reached more than 320 billion euros at that time. It should be noted that the absolute amount of debt is not the main determinant of the occurrence of the crisis, nor even the debt-to-GDP ratio, despite the importance of these two indicators. Rather, the internal economic situation of the state, the strength of the financial sector, and the future of the state is what determines the status of each state.
Therefore, we find that the country with the largest debt in the world is the United States, with debts exceeding $33 trillion, and the country with the highest public debt-to-GDP ratio is Japan, with debts amounting to 260 percent of GDP. Despite these bad indicators, there is no fear that these two countries will fail to pay. On the other hand, Greek bond yields rose from pre-crisis levels of 5 percent to more than 130 percent when the government debt crisis was declared at the time.
The reasons for default are usually the result of the slowdown in the growth of the domestic product and the rapid increase in the levels of internal and external debt. In the case of Greece, cases of falsification of government data were later revealed in a way that concealed the true economic situation and the debt ratio. Signs of default appear when the government budget deficit continues from year to year at a time when cases of tax evasion and financial corruption are increasing, forcing the government to rely on external borrowing to pay off that deficit.
The role of rating agencies is to monitor potential defaults to inform investors of this, who are usually international banks and major lending institutions, and then begin negotiations that often end with large concessions from lenders, exceeding 50 percent of the principal and more.
Lending to states differs from lending to companies and individuals in that bankruptcy laws are completely different. It is not possible to liquidate government assets to pay off the debt, nor can someone be imprisoned until payment is made. Therefore, the biggest sufferers as a result of the state’s default are the state itself and its citizens, as the state finds that it is forced to accept the terms of the new lenders, such as the International Monetary Fund and the World Bank, as well as the conditions of the current lenders, who will require austerity operations, internal financial arrangements, and raising tax rates to accept the “haircut.” which will relieve the burden of debt.
Recovery following defaulting on payment takes a long time in many cases. Greece, whose GDP was more than 350 billion dollars before the outbreak of the 2008 financial crisis that broke the camel’s back, and since that time, Greece has been in a state of economic recession and a continuous decline in GDP below 200. billion dollars in 2015, with a slight recovery in the last two years to levels of $220 billion.
