What happens when a country defaults?
Hard negotiations: Unlike personal or corporate debt default, sovereign debt does not lead to any sort of asset repossession. What follows instead is managing obligations so that the nation continues to meet its obligations, failing which it could lose access to markets and investment, which in turn could lead to a long-term economic collapse. To do this, the debt will need to be restructured, which will include negotiations on interests, penalties and write-downs. Lanka is due to start talks with IMF next week, and its central bank said a comprehensive restructuring will be needed
Acute short-term pain: Immediately, the default is likely to drive down the value of the currency and expose the nation to even higher interest rates. Effectively, this means it stares at a situation where its own currency will be able to buy even less of imports – for instance, oil – and it will be much harder for the govt to borrow. It’s also crystallised in sovereign credit rating downgrades that agencies made recently for the country. For instance, Fitch downgraded Sri Lanka to ‘CC’, which implied a default was inevitable
Long-term threat: While past sovereign debt crises have not all played out in the same manner, the worse outcomes have led to a sustained drop in economic output as a consequence of wide curbs that can come from negotiations. In a research published in 2021, non-profit agency Oxfam reported that strict austerity measures were a crucial condition in loans provided by IMF to developing nations with a serious debt problem. These austerity measures typically include spending cuts and higher taxes. For citizens, who are already staring at a shortage of essentials, this generally means a prolonged period of belt-tightening
Silver lining? Economists have seen that sovereign debt can result in sharp and/or persistent recessions, but also end in little to no impact, with the nations regaining access to markets. In this case, it will depend on negotiations. Tuesday’s announcement opens door for corrective action, experts believe. BBC quoted Lakshini Fernando of Asia Securities as saying it was a "better option compared with a hard default"