Debt Default

3 Key excerpts on "Debt Default"

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  eBook - ePub

  Lived Economies of Default

  Consumer Credit, Debt Collection and the Capture of Affect

  • Joe Deville(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Introduction Lived economies of default

  We have become all too used to default. Ever since the first global recession of the twenty-first century broke towards the end of its first decade, the issue of credit default has not been far from the lips of media commentators, politicians and, sometimes, academics and the public.

  This is perhaps surprising. Within the credit industry, default is a largely technical term, used to refer to the moment at which a borrower is deemed to have broken the conditions of their credit agreement by not repaying a debt according to its agreed schedule. Now, however, the term has come to stand for a crucial part of contemporary social and economic life that seems to in some way have become ‘broken’.

  The reason for the movement into the mainstream of talk about default can, of course, be found in those moments in and around 2007 when the credit-driven origins of the ongoing economic turmoil became publicly visible. Amidst the range of factors that set in motion what was to become a global economic crisis, it was the rapidly increasing volume of defaults on sub-prime mortgages in the United States (US) that achieved particular public prominence. As many of us came to learn, these mortgages were deeply wrapped up in the global financial system. Complex financial products had been built on the promise that they would generate a financial return. When this promise turned out to be empty, a destructive chain of events was set in motion that saw the threat of default spread from individual borrowers’ mortgage products to major financial institutions, to the central banks of what had previously seemed to be financially secure, well established capitalist economies. Default was the spectre that haunted the global economy; in many ways, it still is. The response, as we now well know, has often been for governments to pour money into the ailing financial system, while subjecting much of their populations to extended periods of so-called ‘austerity’.

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  eBook - ePub

  Sovereign Credit Rating

  Questionable Methodologies

  • Ahmed Naciri(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The link between public default and sovereign economic crisis can become more evident from many sovereign default experiences, or even from the last European sovereign crisis and from the fact that since the beginning of the nineteenth century, most sovereign defaults have occurred because of unexpected turn of economic or social events. It is argued, for instance, that starting in 2009, reports of bad news regarding the sustainability of public debt in Greece, Italy and Portugal undermined the banking sectors in these countries (Gennaioli et al., 2015), as national banks were suddenly exposed to their governments’ bonds. Logically, sovereigns should have strong incentives to repay their debt, even if only to escape foreign sanctions and/or exclusion from the international global markets. But sanctions are rarely observed and market exclusions can only be of short duration. Therefore, the relatively low frequency of defaults should have other explication, and it is argued, for instance, that the huge cost on the domestic economy that might be imposed by default is perhaps dissuading governments to repay their debts, at least in part (Arellano, 2008). The Russian default of 1998, for instance, caused a lot of harm to the Russian economy, particularly to Russian banks that were heavily investing in public bonds, and the banking crisis ended up precipitating the devaluation of the rouble and the rapid collapse of whole Russian financial sector. As a rule, defaults, however, can be very painful for defaulting countries, in at least two ways, particularly when financial inabilities are occurring unexpectedly and in a disorderly manner:

  1. (i)   When investor and local savers, anticipating a decline in the value of the local currency, may strive to withdraw their bank account deposits and move them out of the troubled countries, eventually forcing troubled governments to temporarily shutting down banks and imposing capital controls, as the only way to avoid bank runs and precipitous currency depreciation, as happened in Greece in mid-2015. Often, however, such desperate reactions only exacerbate crisis.
  2. (ii)  Whenever sovereign defaulters find themselves submitted to capital market punishment for their default, either by imposition of punitive borrowing conditions or by opposed plea to all their indebtedness demands. Indeed, it seems that on average defaulted sovereign governments remain out of international capital markets for as long as 5.6 years after default and 4.4 years after final default resolution and 45 per cent of defaulters never regained market access during the study period (Moody’s, 2015).

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  eBook - ePub

  Understanding Financial Crises

  • Ensar Yılmaz(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  2

  Debt accumulation

  2.1 Introduction

  Economists generally regard debt as a beneficial instrument that allows money to move from where it is least needed to where it is most needed by borrowers. Hence the deepening of national and international credit markets is thought to increase growth, since it makes it possible for more individuals to borrow from a bigger loan market at appropriate rates of interest. However, whenever a financial crisis occurs, debt turns out to be a problem, thus turning from a ladder into a chute. Hence in recent years the dynamics of debt and its relation with crises has become a much more important issue of economics.

  During the global crisis period that started in 2007, a large number of defaults on mortgages occurred in the US. Financial institutions, especially investment banks, could not bear these defaults. Along with the contagion of defaults, banks with liquidity problems could not continue to lend, hence it spreading to the rest of the economy. Governmental rescues increased public debt as well. This also caused fears to spread about the solvency of sovereign debts of some countries in Europe, ending with Greece’s collapse. Therefore, debt seems to have been both a cause and an outcome of the crisis.

  However, until the Global Recession, in the mainstream economic models, debt was not regarded as an issue that could trigger a sequence of problems, hence it was not incorporated into these models. The main rationale behind this was that borrowers and lenders canceled each other out at the level of the economy, thus every dollar owed by someone was also owed to someone. Hence the incorporation of debt into economic analysis seemed trivial. However, we learn each time from austere times (during crises) that debt is critical in terms of triggering the problems and their deepening. Therefore, debt is a more complex issue and not a simple zero-sum game. Economists have started to deal with new complications by including debt in their economic models such as heterogeneity between debtors and creditors and discontinuity arising from collapse in economic relations.

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