The clouds of the financial crisis are looming over the world for the last one decade. New theories and predictions are coming up. The leaders in a democracy are finding it difficult to convince the voters. Predictions of countries going bankrupt are high. Bankruptcy is a fiery feeling for every citizen. Ever wondered how a country can go bankrupt and what happens afterward? It is important to understand trends of bankruptcy and then predicting the consequences would be easy.
Similar to individual and corporate bankruptcy, a country too becomes bankrupt when its net worth is wiped out. The net worth is the aggregation of the entire entire asset base. Asset base includes the fixed, and liquid current and future revenue resources. This net worth can be wiped out by debt. There are several trends to be monitored. Some of them are;
– Debt as a percentage of GDP
– Interest payable as a percentage of GDP
– Currency trends
– Foreign and local investment trends
– Rankings of rating agencies
– Foreign currency reserve
– Gold reserve
If these trends continue to threaten the economy, the alarm bell has to be pushed to avoid the inevitable.
When Is a Country Declared Bankrupt?
A country can be considered bankrupt if it is unable to service the debt and continues to do so without showing a trend of improvement. When a country reaches close to bankruptcy, it would build different rescue models which may not yield results. This is fatal situation and the card house of economy crumbles. The world is lucky that the wipe-out situation has not happened. One may study the Argentinean crisis or the development in Belize where they came out of the brink of bankruptcy.
Life after Bankruptcy
Once the apple cart of the economy of a country will turn upside down, the situation would go beyond the control of the regulatory authority. Some of the immediate consequences to a citizen of the country is listed below.
– The Free fall of currency – The devaluation would be unprecedented. Most money exchange houses would not buy the currency. Those who are interested would ask for heavy discounts. Whoever is holding the currency would try to convert as much into dollar as possible.
– Wipe out of foreign reserve – Since the citizens and organizations would try to park the money in a safe country, inflow of foreign currency would come to a near halt.
– The Collapse of stock market, financial institutions and private sector – Investors would lose confidence and stock prices would reach the bottom. The commercial organizations would look for survival outside the country.
– Complete stoppage of social sector – All infrastructure projects, social schemes and repair and maintenance work of public utility services would come to a halt.
– Crisis in goods and services. – Due to liquidity crunch and fear of investment, availability of goods and services would be limited. Shops would reduce stocks. Some of them would decide to sell only in dollars.
– Collapse of government – There is and existence of opposition force in some form in every country. It can be an opposition party, internal military force or even a hostile neighbor looking for their pound of flesh. The citizen would look for any force who can assure them a safe and secured life.
It can be described in one word as the “Anarchy”. International community is well aware of such situation. Safety measures are taken well in advance to guide the governments to a positive state.
Author Bio: Alvin Trujillo is an economy analyst and a financial advisor. He is also part of BankruptcyBlogger.org team, a site where you can get tips on debt relief and finance.