Recently, more and more economic terms penetrate the vocabulary of ordinary people. They abound in statements by journalists and politicians. Therefore, people can only understand. The concept of “technical default” also entered into everyday life. But what it means and how it differs from ordinary default on debt remains a complete mystery to most. Our article aims to help sort this out.
Definition of concepts
Default is debt non-payment. This negative situation may be the result of reluctance, lack of opportunity for the borrower, failure to fulfill one or more points of the loan agreement. There are ordinary and technical defaults. This concept should not be confused with insolvency, illiquidity and bankruptcy. All are related terms, but have a number of significant differences. Default actually means that the borrower did not pay the debt, as agreed in the loan agreement. Insolvency is a legal term that describes this situation. The borrower's illiquidity means that he does not have enough cash to pay off his debt right away. Bankruptcy is a special state of a legal or natural person in which its full or partial insolvency is a formally confirmed fact.
Types of Defaults
Different dictionaries give different definitions of this concept. As a rule, it is customary to associate a default situation with legal entities that are partially or completely unable to pay debt obligations. And this is the worst that can be inscribed in the credit history of a commercial structure. The probability of receiving loans in the future is practically zero. In addition, as a result of the procedure of formal confirmation of insolvency of an individual or legal entity, that is, bankruptcy, it may lose all or part of its property. There are three types of this phenomenon: technical default, debt servicing and sovereign. The first is our article.
Technical default
This species is the simplest case with the least negative consequences. Technical default occurs whenever a debtor violates a specific clause of a loan agreement. Most often, they are required to pay. For example, you took a loan, but you cannot repay it on time due to an unexpected delay in salary. Within a few days, this situation can be completely resolved. Also, the technical default of the borrowing company can occur automatically if the value of some indicator exceeds the limits established in the agreement. In this case, the borrower may continue to pay the debt. However, the clause of the contract is not respected, therefore there are not fundamental, but technical problems with the fulfillment of the obligations undertaken.
Russia in 1998
This August became truly “black” for the country. Due to the difficult economic situation, the authorities were forced to declare a technical default. This led to the fact that the ruble devalued three times, and inflation rose to unprecedented heights. The total loss of the national economy from the "black August" amounted to more than 96 billion dollars. Experts have expected a collapse of the economy since the beginning of 1996. There were both internal and external reasons for this in the country. After the collapse of the USSR, payments on foreign loans fell on the shoulders of the Russian Federation. The external debt of the country amounted to 96.6 billion dollars. The situation was aggravated by internal problems of Russia.The expenditure side increased more and more, and the “holes” were closed due to the issue of state treasury bonds. Due to exorbitantly high interest rates, demand for them was quite large. In fact, their release system has turned into a financial pyramid. The state could cover old obligations only by issuing new treasury bonds.
Argentina in 2001
Technical default in the country was the culmination of a general recession, which has been observed since 1998. Terrible unemployment reigned in Argentina. The population massively withdrew money from accounts and converted them into dollars. The government imposed restrictions on the purchase of foreign currency. After the IMF refused to provide another tranche, riots began on the streets. As a result, several dozen people died, and the president fled the country. The first acting head of state stayed for a week, but managed to default on external debt. Failure to fulfill debt obligations led to a complete loss of investors. The second acting president of the country introduced a floating exchange rate, which provoked even greater inflation. The recovery in the economy began only in 2003 due to the cheapening of exports from the state and the high demand for agricultural products from Argentina from Brazil and China.
Greece in 2015
Technical default in this country was a direct consequence of the European debt crisis. But the reasons for insolvency were not only external, but also internal. The Greek government deliberately corrected the statistics for a sufficiently long period of time in order to show the level of budget deficit, which is due to the EU member, that is, at the level of 3% of GDP. And only in 2009 was information published on the current state of affairs. Since 2010, Greece has been completely dependent on EU support. However, by June 30, 2015 state debt reached 312.7 billion euros. The next day, Greece did not transfer the IMF the agreed tranche of $ 1.54 billion to pay off the country's debt.
Default represents the actual default on debt. Such a situation can have three reasons: the borrower's reluctance, his lack of opportunity or his failure to fulfill the points of the loan agreement. The following types of default are distinguished: technical, debt servicing, and sovereign. The first is the simplest, since it leads to the least loss.
