A State is in suspension of payments or default, according to the anglicism currently used, from the moment in which it cannot repay the debt or pay the interests, without therefore disappearing, as it happens to a bankrupt company.
The most recent examples are Lebanon, which defaulted on March 9, and Argentina, which on Monday postponed to 2020 the payment of most of the interest it was due to pay in 2019.
Other emerging countries with economic difficulties and hit by the new coronavirus pandemic could find themselves in the same situation shortly.
How does a country enter into suspension of payments?
A country is in default when it cannot repay loans – or “bonds” in financial parlance – that are due or when it can no longer pay the interest. The affected creditors may be international institutions, such as the International Monetary Fund (IMF).
Unlike companies, which go into liquidation in the event of bankruptcy, the States do not disappear and can accumulate several suspensions of payments such as Peru, which had five from 1976 to 1997.
What institution declares or verifies it?
For an individual or a company, it is a specialized jurisdiction that declares bankruptcy.
But in the case of the States there are several possibilities: the government itself can declare it, announcing that it stops repaying the debt that reaches the due date for payment.
It can also be declared by a financial rating agency that decides to classify the country in partial or total default, as happened with Venezuela in 2017 when SP Global Ratings found that the country could not refund $ 200 million.
It is also possible that it is established by a private creditor, publicly revealing that a country has stopped reimbursing it, or the US agency ISDA, a professional organization that brings together the main players in the derivatives market.
What are the financial and judicial consequences?
The first consequence is to separate the country from the international financial market. In theory, creditors have the right to appropriate the country’s assets abroad.
At the judicial level, the country that goes into suspension of payments is exposed to international sanctions, mainly to the commercial retaliation of the countries of residence of the creditors. It will also carry a reputation as a “poor payer” that will complicate its financing for years to come.
The IMF can launch a rescue plan.
How is debt restructuring going?
Restructuring a debt means staggering repayments and often reducing or erasing debts. Therefore, the restructuring of a debt presupposes that the country is in “suspension of payments”, but that, nevertheless, it hopes to reach an agreement with its creditors.
The operation may also attract “vulture” funds that want to take advantage of the state’s weakness to obtain high rates or launch legal procedures, as was the case during the Argentine suspension of payments in 2001. These complications considerably prolonged the negotiations.
To accompany the process, there are several informal groups, such as the Paris Club or the London Club.