Sovereign default

A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments.

If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default.

[3] Today, a government that defaults may be widely excluded from further credit; some of its overseas assets may be seized;[3] and it may face political pressure from its own domestic bondholders to pay back its debt.

To ensure that funds will be available to pay the remaining part of the sovereign debt, it has made such loans conditional on action such as reducing corruption, imposing austerity measures such as reducing non-profitable public sector services, raising the tax take (revenue) or more rarely suggesting other forms of revenue raising such as nationalization of inept or corrupt but lucrative economic sectors.

After the 2008 financial crisis, in order to avoid a sovereign default, Spain and Portugal, among other countries, turned their trade and current account deficits into surpluses.

Such willful defaults (the equivalent of strategic bankruptcy by a company or strategic default by a mortgager, except without the possibility of the exercise of normal creditors' rights such as asset seizure and sale) can be considered a variety of sovereign theft; this is similar to expropriation (including inadequate repayment for the exercise of eminent domain).

Reasons for this include:[citation needed] Sovereign default caused by insolvency historically has always appeared at the end of long years or decades of budget emergency (overspending[12]), in which the state has spent more money than it received.

[citation needed] If a country is temporarily unable to meet pending interest or principle payments because it can not liquify sufficient assets, it is "in default because of illiquidity".

Nevertheless, especially after World War II the government debt has increased significantly in many countries even during long lasting times of peace.

The reputation approach stipulates that countries value the access to international capital markets because it allows them to smooth consumption in the face of volatile output and/or fluctuating investment opportunities.

This kind of agreement assures the partial repayment when a renunciation / surrender of a big part of the debt is accepted by the creditor.

However, a monetarily sovereign state can take steps to minimize negative consequences, rebalance the economy and foster social/economic progress, for example Brazil's Plano Real.

This sovereign default threw the German banking houses into chaos and ended the reign of the Fuggers as Spanish financiers.

In return the less dependable shipments of American silver were rapidly transferred from Seville to Genoa, to provide capital for further military ventures.

These same countries frequently defaulted during the nineteenth century, but the situation was typically rapidly resolved with a renegotiation of loans, including the writing off of some debts.

As protectionism by wealthy nations rose and international trade fell, especially after the banking crisis of 1929, countries possessing debts denominated in other currencies found it increasingly difficult to meet terms agreed under more favourable economic conditions.