A country and bankruptcy

What is Bankruptcy: 

Bankruptcy is the status of a debtor who has been declared by judicial process to be unable to pay his debts. Although sometimes used indiscriminately to mean insolvency, the terms have distinct legal significance. Insolvency, as used in most legal systems, indicates the inability to meet debts. Bankruptcy, on the other hand, results from a legal adjudication that the debtor has filed a petition or that creditors have filed a petition against him.

Example of bankrupt:

Many people have this question that when a country goes bankrupt, what happens to the fate of the country?

In 2012, the Argentine Navy ship Libertad was undergoing its annual training exercise with a total crew of 250 including recent graduates. Elliott Capital was able to detain the ship and its crew in Ghana’s Tema port for several months due to the country’s default on foreign debt. Although the ship was later released, it is a great shame for a country.

Greece has a record of debt defaults. They have gone bankrupt countless times in their history. Greece has a long history of bankruptcy. In 377 BC Greece became the world’s first bankrupt. Since independence in 1829 they have gone bankrupt numerous times.

Spain went bankrupt about 15 times in the eighteenth and nineteenth centuries.

Recently Sri Lanka went bankrupt.

What happens when a country goes bankrupt?

When a country’s debt management is not on track, the country’s fiscal pressure increases. Contact with IMF begins. IMF offers bail out package to avoid bankruptcy. Since becoming a member of the IMF in 1950, Pakistan has taken a total of 22 bailout packages till 2019. The IMF’s package of dollar-denominated loans to avoid bankruptcy is not on very easy terms. For this, IMF helps the country with their experience. However, considering the situation, the budget has to agree to accept various conditions including reducing expenditure in various sectors, stopping subsidies, changing business policies.

Many countries have had a terrible experience with bankruptcy. In 1882, Britain invaded Egypt to force Egypt into bankruptcy. In 1915 America occupied Haiti. In the 1890s America used its naval power to threaten Venezuela in what later became known as gunboat diplomacy.

It cannot be said that these madness’s of the past do not exist at all now. But the style has changed a lot.

Now let’s come to the word bankruptcy. When a person is declared bankrupt by the court, his personal property is sold subject to the order of the court to pay off as much of the debt as possible. He can keep few resources to move on. But it is determined according to the law in each country. In many countries, bankrupts lose many state benefits, including voting rights.

The natural question is what happens if a country goes bankrupt?

A country never really goes bankrupt. When a country’s government fails to pay its debts, that country’s government is bankrupt. Earlier, one country would threaten to attack or attack another country if it failed to repay the debt. But according to Article 2 (4) of the UN Charter, the use of force against defaulting countries is prohibited.

That does not mean that a country survives by declaring itself bankrupt. In such cases all or part of the country’s debt is rescheduled. A country’s government has to be under extreme pressure if it fails to pay its foreign debt.

Initially, the value of the bankrupt country’s currency depreciates rapidly. No control over the value of their own currency. The important thing here is, many people argue that the market rate of Japanese yen is very low, if the value of Sri Lankan or Pakistani currency is reduced then where is the problem? The problem is the yen is a stable currency. A country can devalue its currency if it wants to encourage exports. But in this case there is control over the value of the country’s currency or the value of the currency does not often fall in value. China can be an example in this case. Western countries have accused China of devaluing the yuan to take advantage of the currency’s value.

Currency depreciation is a free fall for countries that are at risk of defaulting on debt. Sri Lanka can be a good example in this regard. The Sri Lankan currency lost 57 rupees against the dollar in the space of just one week in early March. It touched 325.04 LKR in a gap of one month on April 12.

In such a case, the biggest loss a country can suffer is the loss of credit access. No one wants to lend where the risk is high. However, its conditions and interest rates are very high. In such cases, the country does not have money to pay the import bill. And in the present context, if any country cannot do foreign trade, it has to suffer dire consequences. Commodity prices skyrocketed. Civil unrest may begin. In the case of Sri Lanka, the enviable success of the country’s apparel sector has faded in the blink of an eye due to this situation. The factory is closed due to lack of electricity. The way to import raw materials for export is almost blocked.

Analysis of recent events shows that when there is extreme chaos in the country, the government tries to control the currency and foreign trade to increase the dollar. In many cases there are long queues to withdraw money at banks or ATM booths. Recently, Greece was forced to close banking for about 20 days to deal with such a situation.

Another long-term negative impact is on the country’s sovereign rating. The country is downgraded to non-investment grade by agencies like S&P or Moody’s. Outlook becomes negative. As a result, foreign investment decreases. After all, all sectors of the country are affected. Domestic production or GDP falls by a huge margin. Inflation rises at abnormal rates. The situation may also be such that even issuing trillion dollar bank notes like Zimbabwe is not saved. In many cases, assets of one country accumulated in another country can also be forfeited. Sectors like education, health or agriculture do not have scope to keep adequate allocation in the budget. Basically it’s an ultimate chaos situation.

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