Student: Sir, can a country default on debt? If so what recourse does the lender have?
Professor: Difficult question. But let us look at what is happening now. Argentina owes 2.3 billion dollars to foreign bond holders and has just announced that it cannot pay. This is the default on debt.
Student: Scares me. What happens to the country’s credit rating?
Professor: What can the country do? They simply cannot repay. Argentina has done this before in 2001. At that time, it froze all bank accounts, devalued its currency Peso. This lead to country wide riots and a recession followed. Now this time recession may not be the outcome but a hike in the inflation rate is possible which will lead to a hike in the interest rate. In fact President Cristina Fernandez Kirechner government has called the investors, to negotiate a settlement.
Student: This means what?
Professor: You can take Argentina to court. The investors know this and will accept settlement. This could include
- Paying off the debt over a longer period of time
- Reduce the payment amount by offering discount
- Lower or cancel the interest rate and revise payment
- Give more loans to ensure that the previous loan is returned
Student: Professor, should India worry?
Professor: Yes slowly, but we are getting there. The debt level around $ 430 bln is increasing but we have foreign reserves to pay the interest. As of now we have $ 310 billion dollars of which nearly $ 200 billion dollars is FII money which could move out if the stock market doesn’t produce the return they want.
Student: I will keep my attention to these developments. Thank you sir.