The dollar has already taken a hit in recent years amid efforts by countries including Russia, China, Iran, and others to move away from dollar payments in trade, switching to euros or local currencies, and concocting other financial tools through which to escape sanctions and other forms of pressure from Washington.
The current congressional debt ceiling showdown may serve as just the impetus needed for this to occur. An increase in T-bill yields due to their higher perceived risk would cause a major jump in borrowing costs for ordinary Americans and businesses.
Other loans —for businesses, consumers, students, etc. Firms like materials suppliers as well as construction and design firms will all be impacted negatively if Evergrande defaults. The most far-reaching consequence could be due to the money the firm owes to nearly banks and non-banking institutions. A default by Evergrande could lead to a credit crunch in the market. That looks like a proper bubble pic.
Evergrande isn't the only Chinese company unable to make interest payments - corporate bond defaults in China are piling up. Another Chinese homebuilder Fantasia Holdings also failed to make an international market debt repayment on time. Mexico defaulted on its debt following the Peso Crisis in At the same time, the government was forced to buy U. The amount represented one-seventh of all the money borrowed by the third world at the time.
Country defaults tend to be very different than businesses or individuals. Instead of going out of business, countries are faced with a number of options. Often times, countries simply restructure their debt by either extending the debt's due date or devaluing their currency to make it more affordable.
In the aftermath, many countries undergo a rough period of austerity followed by a period of resumed and sometimes rapid growth.
For instance, if a country devalues its currency to pay its debt , the lower currency valuation makes their products cheaper for export and helps its manufacturing industry, which ultimately helps jumpstart its economy and make debt repayment easier.
Iceland was a notable exception in when it let its largest banks collapse without bailing them out with foreign aid. Many economists have pointed to the country as a model for the future. Lenders also eventually borrow again to even the most un-creditworthy countries because they generally don't lose everything - like in a business or personal bankruptcy.
Rather, countries tend to restructure debt albeit in unfavorable terms and will always have assets to recover down the road. After all, a country can't exactly close its doors forever. Predicting sovereign defaults is notoriously difficult, even when things appear to be bleak for a country.
Follow her on Twitter ARiquier. Home Markets Market Extra. Market Extra What happens if the U. Last Updated: Oct. ET First Published: Sept. ET By Andrea Riquier. Will the U. What in the world is Phunware?
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