Debt default

Debt default

Part of: Prelims and GS III – Economy 

Context: Sri Lanka has  recently announced a debt default on all its foreign debt totalling $51 billion as a “last resort”.

• Despite economic strains in the past, Sri Lanka had maintained an unblemished record of debt servicing that made the country a favourable partner for creditors.
• Meanwhile, the Governor of the Central Bank of Sri Lanka has sought donations of “much-needed foreign exchange” from Sri Lankans living abroad, to augment the country’s reserves as it grapples with severe shortages of food, fuel, and medicines.

What is a Debt Default?

• A debt default happens when a borrower fails to pay his or her loan at the time it is due. 
• The time a default happens varies, depending on the terms agreed upon by the creditor and the borrower.
• Some loans default after missing one payment, while others default only after three or more payments are missed. 
• In such an event, serious repercussions can happen, such as getting a poor credit rating.
  • Credit represents an individual’s ability to borrow money. 
  • When an individual applies for a loan, whether secured or unsecured, the creditor looks at the person’s credit score because it helps determine if the person is likely to be able to pay back the loan and its interest.

News Source: TH