The Impact of Defaulting

IESE Prof. Rolf Campos on what happens when a country fails to pay its debts

02/05/2012 Worldwide

Rolf Campos

The Consequences of Defaulting

Given current concern among investors about the sovereign debt of weaker countries, several questions should be asked, such as: What happens when a country decides to default? How long until it can reaccess international markets? How does the size of the default impact the country's economic future? IESE Prof. Rolf Campos gives his analysis in this interview.

In this interview, IESE Prof. Rolf Campos explains that in the 1980s many countries defaulted but significantly fewer people were aware of it because the debt was owed to banks and was not issued in bonds. The case of Greece has gained unprecedented attention because it is a developed country, he said, which has sparked additional concern among investors.

Overall, not much happens when a country defaults, he says, and in fact, most countries are able to reaccess markets relatively soon. Research indicates that 50 percent of countries default are able to reaccess financial markets after just three years. The larger the debt, however, the longer it takes to reaccess markets. And interest rates on debt is higher for countries that have defaulted than those that have not.

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