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What will happen if a nation is unable to pay its external debt?

Question:

What will happen if a nation is unable to pay its external debt?

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:

  1. 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.
  2. 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:

  1. 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.
  2. 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.
  3. 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.

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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