A complete default on debt repayment and service by a debtor nation. This constitutes an outright cancellation of all current and future foreign debt and equity obligations. This sovereign move usually denotes a state bankruptcy. However, it may have some advantages to the defaulting country among which are: (1) Eliminating the need for taxation to finance the debt. (2) Being able to eliminate primary deficits. On the other extreme, the government might not be able to borrow in the future and as such it would be “liquidity constrained” because no country or institution would accept to lend a defaulting nation, at least on the short- to medium term. Examples of countries that repudiated their external debts are China (1949), Cuba (1961), and North Korea (1964).
July 9, 2021
