What will happen if a nation is unable to pay its external debt?
External debts are loans that are obtained from other nations. There are various factors that influence a country from obtaining loans from other countries. These factors include:
- Size of loan. The amount needed by a nation may be too huge to raise therefore, the nation opts to borrow loans from other developed nations.
- Cost of borrowing. Loans usually have an interest rate. Financial institutions in a country may charge high-interest rate forcing the nation to borrow from countries where such interest rates are small.
Answer and Explanation:
If a nation is unable to pay its external debt, the following may happen:
- A nation is listed as one of the sovereign defaulters. When a nation is granted a loan, the principal amount and the interest should be paid back to the lender. Therefore if a nation is unable to repay then it is listed as one of the defaulters.
- The nation may not be able to acquire any more debt. When a country is listed as a defaulter, no other nation will be willing to lend to loan defaulter nation. Therefore, acquiring a loan from another nation will be hard.
- The collateral is seized. Where collateral is used to secure a loan and the nation fails to repay the loan, the lender mar seize and sell the collateral as a compensation for the borrowed loan.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Financial Accounting: Help and ReviewChapter 8 / Lesson 7