Question
What happens when a country runs out of money and the income cannot meet it's obligations. Assume it has it has issued all the bonds that the market can take (now Junk) and is borrowed to the hilt.Answer
I suppose one of several scenarios, probably in an order of preference along the following lines:
1. Print more money - it seems obvious, if you run out of money then print some more. The trouble is, unless the extra money is backed by real assets (e.g. gold) then it's arguably worthless. A big increase in money supply would simply push up prices and devalue the currency (i.e. weaken the exchange rate versus other currencies). While a bout of high inflation would be good news for the government concerned (as their debt would fall in real terms) it would probably push their economy into an even deeper hole. Plus, if the country concerned is part of a common currency (e.g. the euro) then it doesn't have the autonomy to print more money anyway.
2. Seek bailouts - it's generally in no-one's interests for a country to go bust. It creates panic in markets, potentially rocks the global financial system and leaves those owning government debt out of pocket. Bailouts, whether from the IMF, EU(if relevant) or other sources won't solve the underlying problem (a country is spending more than it earns), but it buys time for a country to try and shore up their finances (i.e. raise taxes and cut spending) and get back to a position where they can once again borrow money via the markets. The downside is that the terms can sometimes be expensive for the destitute country and propping up economies that have little chance of getting back on track is simply delaying the inevitable (default). This, I believe, is the case with Greece.
3. Default - this means stopping interest payments on debt (i.e. government bonds) and even writing off the bonds altogether. While writing off debt is the simplest option, it's quite extreme. It'll cause big panic, government bond holders (which includes foreign banks) will lose their shirts, the local population will scramble to withdraw their money from banks (probably making the banks insolvent) and the ramifications will be felt across markets around the world. It also makes it difficult for the country to borrow in future, as its credibility will be shot. However, the aftermath doesn't necessarily last forever, Argentina defaulted in 2001 - a disaster at the time. But its economy has subsequently grown quite strongly and the country has, to an extent, bounced back.
I realise these are very simplistic explanations and there may be more scenarios (readers, if you have any opinions please post below), but they'll hopefully give you a general idea of what tends to happen when a country runs out of cash.
What happens when a country runs out of money and the income cannot meet it's obligations. Assume it has it has issued all the bonds that the market can take (now Junk) and is borrowed to the hilt.Answer
I suppose one of several scenarios, probably in an order of preference along the following lines:
1. Print more money - it seems obvious, if you run out of money then print some more. The trouble is, unless the extra money is backed by real assets (e.g. gold) then it's arguably worthless. A big increase in money supply would simply push up prices and devalue the currency (i.e. weaken the exchange rate versus other currencies). While a bout of high inflation would be good news for the government concerned (as their debt would fall in real terms) it would probably push their economy into an even deeper hole. Plus, if the country concerned is part of a common currency (e.g. the euro) then it doesn't have the autonomy to print more money anyway.
2. Seek bailouts - it's generally in no-one's interests for a country to go bust. It creates panic in markets, potentially rocks the global financial system and leaves those owning government debt out of pocket. Bailouts, whether from the IMF, EU(if relevant) or other sources won't solve the underlying problem (a country is spending more than it earns), but it buys time for a country to try and shore up their finances (i.e. raise taxes and cut spending) and get back to a position where they can once again borrow money via the markets. The downside is that the terms can sometimes be expensive for the destitute country and propping up economies that have little chance of getting back on track is simply delaying the inevitable (default). This, I believe, is the case with Greece.
3. Default - this means stopping interest payments on debt (i.e. government bonds) and even writing off the bonds altogether. While writing off debt is the simplest option, it's quite extreme. It'll cause big panic, government bond holders (which includes foreign banks) will lose their shirts, the local population will scramble to withdraw their money from banks (probably making the banks insolvent) and the ramifications will be felt across markets around the world. It also makes it difficult for the country to borrow in future, as its credibility will be shot. However, the aftermath doesn't necessarily last forever, Argentina defaulted in 2001 - a disaster at the time. But its economy has subsequently grown quite strongly and the country has, to an extent, bounced back.
I realise these are very simplistic explanations and there may be more scenarios (readers, if you have any opinions please post below), but they'll hopefully give you a general idea of what tends to happen when a country runs out of cash.
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