What Happens When A Government Defaults?

Greece is all over the news and not for any good reasons. The country that gave us Greek gods and spanakopita is currently embroiled in the midst of a financial crisis…and possibly a government default.

What’s Going on With Greece?

In 2009, the Greek budget deficit hit a crazy 12.7% of Gross Domestic Product (GDP), leading many to question the nation’s ability to pay back its debts. Many of the top ratings agencies, i.e.: Fitch, Moody’s, Standard & Poor’s, would eventually downgrade Greek government bonds to junk status. And when we say junk status we don’t mean it in an urban, hip sort of way. Their bonds were basically being branded as worthless. 

Interest rates on government bonds sky-rocketed to the point where Greece could not afford to borrow any money. After being priced out of their own bond markets the Greek government had to request a bailout ($$$ please)….twice.

government default

The problem: all that money they accepted came with strings, as is often the case. 

The bailout funds from Europe came with some pretty harsh austerity conditions. They were basically being told to tighten their belts or to watch as their funding dried up. 

This was fine, until a new Greek government came into power and essentially decided: well, no. We’ll do what we like. Thanks though. 

And that’s how we find the Eurozone and Greece locked in a dangerous game of financial chicken. Each needs the other. Greece cannot continue without more bailout money. And if Greece collapses – what will that mean for the Euro area? If both parties continue down this road of brinkmanship, we might just find out. 

The scariest scenario is a Greek default – a failure to pay a loan – which causes a domino effect across Europe. Remember, countries like Spain, Italy, Portugal and Ireland are in similar situations. 

The question now becomes: what happens if Greece can’t pay back its loan? Have there been other countries that have defaulted before? 

Yes.

Nations have failed to meet their debt obligations on many occasions. As far back as the 1500s, King Philip of Spain defaulted on Spanish debt four times between 1557 and 1596.

In more modern times, there have also been numerous sovereign debt defaults. There would have been more, if not for similar bailout-style rescue packages. 

In 1998 there were three separate default events. Between July and September of 1998, Venezuela, Russia and Ukraine were all unable to make good on their debt payments. Venezuela defaulted on $270 million worth of domestic currency bonds, and Ukraine needed to write off more than a billion dollars in debt – but in the summer of ’98 it was Russia that stole the show. 

Russian Financial Crisis

The Russian financial crisis was precipitated by the Asian financial crisis in 1997 and exacerbated by further currency woes. 

The Ruble was in the toilet. Russians were on strike and low oil prices meant Russian energy, so often the lifeblood of the economy, was worth less and less. Over $20 billion in bailout money was prepared by the IMF and World Bank – $5 billion of which was promptly stolen upon arrival in Russia.

The Russian government basically then issued a memo to their creditors saying something to the effect of “sorry guys, we won’t be paying you”.

Russia would go on to write off $72 billion in debt.

 government default

If that seems impressive, just wait. We still have yet to talk about Argentina. 

Argentine Financial Crisis: Biggest Government Default. Ever.

In December 2001, Argentina pulled off the largest sovereign debt default in history: nearly $83 billion

The 2001 debt crisis had many instigating factors. Bad economic practices meant that Argentine government finances were in shambles way before the default ever happened. In the 80’s, Argentine economic policy was this: throw money at the problem and hope it goes away. Unsurprisingly debt levels soared during this period. 

In 1983 democracy was restored. The new president installed austerity measures and a new currency (the austral) was born. All they were really doing was slapping a fresh coat of paint on a junky car, because this was immediately followed by the taking out of fresh loans to service old debts. 

When commodity prices collapsed in 1986 it meant that the country was in deeper trouble. Wages fell by almost half and the government responded by raising prices on state-run services. As Argentines lost confidence in their government, inflation spiralled out of control – reaching 200% in July 1989.

That’s the Argentine backdrop as we enter the 90s. 

Much of the 90s was spent trying to fight inflation. The high public debt hadn’t gone anywhere either. The IMF kept lending money to Argentina with abandon. Foreigners were eager to lend to Argentina, unaware of the real risk factors as credit reports overestimated Argentina’s strengths. 

In 2001, disaster struck. 

government default 

The situation had simply been allowed to go on for far too long. The IMF had propped up Argentina, lending too much for too long a period of time. On December 20, 2001 Argentina defaulted on their debt. They owed private investors bonds with a value of $81.8 billion, $95 billion to the IMF and $6.3 billion to the Paris Club countries, an informal group of countries that lend money.

What Follows a Default Declaration?

A government default happens when a government is unable to make its debt payments. 

But then what? 

Well in Argentina’s case, you go to court. 

Facing a huge debt burden Argentina insisted on asking its creditors for write-downs. They wanted all the debt to be wiped off the record. A clean slate. Easy.

Yeah, right. 

After years of negotiations, Argentina elected to settle through the SEC (Securities and Exchange Commission) in order to settle with their private creditors. They hoped to reach a final settlement on the $81.8 billion in bonds, which by now had accrued $20.8 billion in interest. 

In the end Argentina issued $35 billion in new bonds to private creditors in exchange for wiping out $62 billion of the debt. The interest was never addressed. 

As recently as 2010, Argentina owed $29 billion in bonds and interest, and $6.3 billion to Paris Club countries. In 2010 Argentina entered another debt restructuring program in which they hoped to get write-offs and pay less than they owed. Private bondholders, of course, were livid. 

So, you ask, what happens when governments default? 

It becomes extremely hard for lenders to get their money back. Like, really hard. In the case of Argentina, you may spend a decade in courts – only to get cents on the dollar. 

Sounds like fun times for Europe.

 government default

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



2 responses to “What Happens When A Government Defaults?”

  1. […] happens next is more of the same. More bailouts. More money being printed to pay for the bailouts. And a bigger bubble. Whether it can be deflated […]

  2. […] is calling the situation, where the island territory was only able to make a payment of $600,000, a default. This marks the first time in Puerto Rico’s history that they have […]