The toughest sanctions on Russia by the west amid the Russia-Ukraine War has landed Russia in its first foreign debt default since 1917.
Russia owes about $40 billion in foreign bonds, and about half of that to foreigners. The last time Russia defaulted on its international debt was in 1917, when the Russian Empire collapsed and the Soviet Union was created.
Foreign debt is money borrowed by a government, from another country’s government or private lenders. Foreign debt also includes obligations to international organizations such as the World Bank, and the International Monetary Fund (IMF). Total foreign debt can be a combination of short-term and long-term liabilities.
Foreign Debt Default
Countries borrow loans from international creditors and issue bonds in exchange for the debt.
However, owing to an insufficient cash inflow, the country often fails to pay back the principal amount as well as the interest amount of the loan to international creditors as well as organizations like the International Monetary Fund (IMF). This is known as sovereign debt or foreign debt default.
Impact Of Foreign Debt Default
Excessive levels of foreign debt can hamper countries’ ability to invest in their economic future—whether it be via infrastructure, education, or health care—as their limited revenue goes to servicing their loans. This thwarts long-term economic growth.
While this is an immediate impact of rising foreign debt, the default to repay the debt brings with it rising inflation and unemployment. The same can make potential investors wary of investing further in the nation that has defaulted the repayment.
With sovereign debt default, countries tend to borrow at higher interest rates, which in turn results in domestic banks lending at higher interest rates. This puts a negative impact on the trade and exports of the country. Furthermore, with less or no trust amongst the borrowers in the government, they try to withdraw money from banks. This worsens the economic crisis.
Countries With A Foreign Debt History
Sri Lanka joined the list of countries that have defaulted on sovereign debt. The island nation defaulted on its foreign debt worth $51 billion as it faces the worst economic crisis, for the first time since its independence in 1948.
Since 1960, 147 governments have defaulted on their obligations, according to a sovereign debt database maintained by the Bank of Canada and Bank of England. This is more than half of the world’s 214 state governments.
Lebanon defaulted on a debt payment for the first time in its history in March 2020 with the country sunk in a deep economic crisis amid huge protests about corruption.
In May 2020, Argentina defaulted for the ninth time in its history, unable to make a $500-million payment. The pandemic sent Belize, Zambia and Suriname into default in 2020.
Venezuela, Mexico, Greece and now Russia have also defaulted their foreign debt repayments respectively.
Now you must be wondering if India ever defaulted its foreign debt payments? Well, the answer is NO. India was in the midst of an unprecedented forex crisis in 1991, but the Reserve Bank in consultation with the Government evaluated a difficult option, and utilised the gold held by the Bank and confiscated gold held by the Government to raise foreign exchange resources.
How Can A Country Manage Foreign Debt Default
When a country defaults on repaying its loans, it usually approaches the IMF for assistance in the form of loans and recovery packages. For example, on April 17, Sri Lanka approached the IMF for the 17th time for a bailout package worth $4 billion. The defaulting country also approaches its unilateral and bilateral allies to alleviate the economic crisis.
Furthermore, the defaulting country can also engage in a debt restructuring plan. This can be done by either extending the date to repay their debts or devaluing their currency. Devaluation is an official lowering of the value of a country’s currency. The devaluation of the currency would mean faster repayment of the debts, cheaper export products, and kickstarting the economy.