B.4- VoN Sovereign Default bad financial and macroeconomic policymaking at home

“MISFORTUNE”
mainly due to external shocks such as a sudden spike in global interest rates, crises in financial center countries, commodity price swings, or natural disasters.
When a sovereign defaults on debt economic growth is likely to slow or reverse, while the national currency could lose value against the U.S. dollar, spurring inflation in countries heavily reliant on imports.

1. SOVEREIGN DEFAULT

2. AGENDA What is Sovereign Default? 01 Real world Examples 03 What Happens When a Country Defaults? 02

3. It is surprisingly hard to define sovereign default It is a broken promise, or a breach of contract. For sovereign debt, such a breach could include a missed payment, involuntary subordination, or data misreporting. In Simplest Term Sovereign default is the failure of a national government to repay its debt.

4. Why Do Defaults Occur? “ MISMANAGEMENT ” meaning bad financial and macroeconomic policymaking at home. “ MISFORTUNE ” mainly due to external shocks such as a sudden spike in global interest rates, crises in financial center countries, commodity price swings, or natural disasters.

5. What Happens When a Sovereign Defaults? The country would likely need to negotiate a debt restructuring with foreign creditors before it could borrow in debt markets again. When a sovereign defaults on debt economic growth is likely to slow or reverse, while the national currency could lose value against the U.S. dollar, spurring inflation in countries heavily reliant on imports.

6. What Happens When a Sovereign Defaults? Defaults do hurt the conditions under which governments can borrow abroad and at home. Defaults lead to the exclusion of sovereigns from international capital markets, as well as to an increase in borrowing costs afterwards.

7. What Happens When a Sovereign Defaults? Sovereign debt crises are accompanied by a significant drop in economic growth. Sovereign default significantly reduces the value of domestic firms on the stock market, especially for exporters and foreign-owned companies.

8. What Happens When a Sovereign Defaults? Legal disputes can disrupt government access to international capital markets, as foreign courts impose a financial embargo on defaulting sovereigns. Sovereign default can also cause major damage on banks and other systemically relevant institutions, especially if they hold large amounts of government debt.

9. Lebanon defaulted on foreign debt for the first time in its history in March 2020, as years of government corruption and wasteful borrowing culminated in a banking and financial crisis amid economic depression. Lebanon's Gross Domestic Product (GDP) shrank by 58% between 2019 and 2021, according to World Bank estimates. The Lebanese economy continued to struggle in 2022 even as the country's government reached a preliminary agreement with the IMF on the economic governance reforms required to secure new IMF funding. Another requirement is that Lebanon negotiate a debt restructuring with private foreign creditors. Two years after the default, talks on such a deal had yielded no apparent progress as of mid-2022. Real World Example

10. Lebanon defaulted on foreign debt for the first time in its history in March 2020, as years of government corruption and wasteful borrowing culminated in a banking and financial crisis amid economic depression. Lebanon's Gross Domestic Product (GDP) shrank by 58% between 2019 and 2021, according to World Bank estimates. The Lebanese economy continued to struggle in 2022 even as the country's government reached a preliminary agreement with the IMF on the economic governance reforms required to secure new IMF funding. Another requirement is that Lebanon negotiate a debt restructuring with private foreign creditors. Two years after the default, talks on such a deal had yielded no apparent progress as of mid-2022. Real World Example

11. Uruguay (2003) Uruguay’s economy was severely impacted by the Brazilian and Argentine crises of the late 1990s and early 2000s, in part due to high dollarization. In May 2002, widespread withdrawals from the banking system, including by Argentine depositors, who held 40 percent of deposits in Uruguayan banks, led the Uruguayan authorities to declare a five-day bank holiday. Facing low foreign exchange reserves and crippling external debt-service payments, the government decided to float the currency. The peso depreciated by 27 percent overnight and ultimately by 50 percent. Public debt, which constituted 40 percent of GDP in 2001, reached approximately 100 percent in 2003………………….. Real World Example

12. Ukraine (2015) Heightened tensions with Russia following the annexation/seizure of Crimea aggravated ballooning financing needs, and it became clear by end-2014 that Ukraine’s debt burden was unsustainable. A preemptive debt exchange operation was announced in January 2015 and launched in September 2015, with three objectives, tied to the parameters of an IMF-supported program: (i) generating USD15 billion in public sector financing over the next three years; (ii) lowering debtto -GDP ratio from almost 80 percent to under 71 percent by 2020; and (iii) limiting gross financing needs to an average of 12 percent of GDP in 2015-18 and 10 percent of GDP in 2019– 25…………………….. Real World Example

13. Sovereign default is the failure by a country's government to pay its debt Sovereign default may slow economic growth and is likely to bar further government borrowing from overseas investors for years. Wars and revolutions, mismanagement, and political corruption are among the leading causes of sovereign default. Distressed sovereign borrowers often seek to negotiate a debt restructuring forcing their creditors to write off part of the debt in exchange for reduced debt service payments. KEY TAKEAWAYS

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