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Category: Glint's Helpful HInts

Glint’s Helpful Hints: Countries run out of money too

When an individual can't pay their debts they are said to be 'in default'. When a country can't pay its debts, this default is called a 'sovereign deb...

26 May 2022

Gary Mead

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When an individual can’t pay their debts they are said to be ‘in default’. When a country can’t pay its debts, this default is called a ‘sovereign debt default’. It is surprisingly common for countries to be unable to repay their creditors; since 1960, 147 governments have defaulted, “well over half the current universe of 214 sovereigns” according to a joint Bank of England (BoE) & Bank of Canada (BoC) study published in 2020. Sri Lanka has just joined the defaulters’ list, having missed interest payments on two $1.25 billion sovereign bonds. Sri Lanka’s total foreign debt is estimated to be more than $50 billion. It’s the first country in the Asia-Pacific region to have defaulted in more than 20 years, but, as this chart (prepared before Sir Lanka actually defaulted) shows, it may not be the last. The BoE/BoC study says that “defaults will pick up again… many advanced and emerging-market economies countries are facing growing public debt burdens”.

Of course, the Covid-19 fallout – including a drop in tourist travel – is blamed, but so too is the war in Ukraine, which has pushed up the price of imported energy, on which Sri Lanka depends. Accusations of mismanagement and corruption have also been levelled at government figures. Debt for countries, like that for individuals, is not necessarily bad – individuals take on mortgages to secure a home and countries borrow in order to develop and grow. But the debts need to be sustainable – countries, like individuals, need to borrow only as much as they can repay.

Sri Lanka has now turned to the international funder of last resort, the International Monetary Fund (IMF) and asked for a bailout of as much as $4 billion. The country’s annual inflation is 30% and heading higher, there are shortages of food, medicine, and fuel, and the currency has almost halved in value since it was floated in March. Negotiations with the IMF are likely to take months and, because the Fund imposes “conditionality” on its loans, public suffering could well get worse before it improves.

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