IndexExplain Strom Thacker's argumentWhy do countries default? What will happen when a country defaults? The effectiveness of Michael Tomz's theory of the IMF can be discussed both positively and negatively. If a private bondholder or commercial bank bases a country's reputation on its external image, self-image and other factors arising from the global market, most countries will have a bad reputation. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay If we take Iraq as an example, it has been ranked as the country with the worst reputation for almost a decade by annual RepTrak reports. RepTrak reports are conducted annually based on each country's external and self-image along with the factors they obtain from global markets. Below are reputation reports from 2017 and 2015. Iraq's economy has been affected by civil war, falling oil prices, and political instability. Their economy has been severely affected. But when they issued bonds in 2017, investors rushed to buy Iraq's first independent bond sale in more than a decade. Orders for $6.6 billion were placed to purchase $1 billion in bonds, which will mature in 2023. All of these bonds were 100% guaranteed by the US government. In fact, the yield was set at a lower level than initial price expectations. Apparently, reputation was not taken into consideration by bondholders who purchased bonds from these countries. It may be because Iraq is largely dominated by the oil sector and its oil exports have gradually increased as a result of its new pipeline and rehabilitation facilities. Although Iraq does not have a good reputation for guaranteeing reimbursement, it has its own oil sector and resources, which countries around the world keep an eye on. The second country is Greece. Its economy recorded a growth rate of just 0.01% in 2016. It is also a country that has undergone numerous bailouts from the European Union and the International Monetary Fund. Greece remains below European regions and also among world averages. The 2008 financial crisis severely affected Greece's economy. Their unemployment rate still remains high. But when they issued the first Greek bond in three years in 2017, they sold 3 billion euros worth of five-year government bonds, and obviously investors and bondholders willingly bought the bonds despite Greece's terrible credit rating and its position as third country. only country to fail to repay the International Monetary Fund. Demand for debt, in fact, exceeded 6.5 million euros, which ultimately drove investors away. In this line, the third country is Argentina. In June 2017, Argentina borrowed $2.75 billion in 100-year bonds yielding 8%, despite its long history of sovereign defaults. It is noteworthy that since its independence in 1816, Argentina has defaulted on its sovereign debts eight times. Including the world's largest default was Argentina in 2001 on $100 billion in bonds. Taking a look at these three countries one can say that reputation or repayment records clearly did not matter to investors, commercial banks or private bondholders. If they had, all these bond sales would have had to take place. But what's noteworthy is that there are also some examples ofloans borrowed from reputation. There are numerous incidents, countries failing to borrow the expected amount through issuing sovereign bonds. A US bond auction in March 2018 failed to attract the required demand. It was a $21 billion bond auction. Bond traders and private bondholders have retreated from lending to America as its budget deficit has widened along with federal reserves rising interest rates. China also failed to participate in a bond auction in June 2015, due to rising interest rates. the returns. In 2011, Germany failed in its bond auctions, attracting weaker bids. It sold $4.92 billion of the €6 billion in a 10-year auction. The average return was 1.98%. Regardless of the country's reputation, these failed bond auctions only took place because of the economic instability of the borrowing country. . It has provided great economic turning points to many countries. It has boosted global economies and stabilized the world monetary system. Although the IMF claims to adhere to universalistic criteria when designing an agreement with the borrowing country, in reality individual governments exercise their power over the IMF's lending decisions. Storm Thacker's thesis can hardly be proven wrong as the US exerts its influence on IMF lending decisions beyond a certain point. The IMF is financed by its member countries, of which the United States owns 17.46% stake with a voting power of 16.52%, apparently a major share owner. The IMF's decision-making structure provides the United States with far more power than any other member government. In May 2009, US officials pressured the IMF to delay a $1.9 billion loan to Sri Lanka, charging that the country was unable to do so. implement strategic reforms. In March 2017, the IMF was pressured by the Donald Trump administration to refrain from participating in the Greek bailout. A bill has also been introduced calling on the Trump administration to oppose any further IMF participation in the Greek bailout plan. The bill also required the United States to oppose any broader reform of the IMF until Greece repaid all of its debts to the IMF. Around the same time, the IMF sent a team of staff to Athens to negotiate with the government, but the IMF was arguing with the hardliners and refused to commit funds due to the influence of the new US administration. Apparently, the United States has influence over the IMF. Why do countries default? Countries sometimes default on their foreign debt when the borrowing government finds itself in a situation where it is unable to repay its debts. Defaults can occur for various reasons. In some cases, the government may have missed a loan payment or it may even be a delay in disbursement. Global capital inflows play a significant role in a country's debt defaults. In boom times, countries borrow money from financial centers or institutions with a greater promise of returns. But as a coin, every situation has its two sides. Countries cannot be trusted to hold positive environments accountable. A simple bank failure can disrupt a country's entire trade. The crisis in the capital flow cycle can lead a country to default on its debt. Argentina, Greece, Russia, Pakistan and Venezuela are few of the countries in debt defaultin recent years. Taking a look at the famous and recent debt defaults, Mexico has defaulted. on its foreign debts following the 1994 peso crisis. The Mexican government was forced to purchase US dollars at devalued pesos, with the aim of repaying Mexico's national debt. Later an $80 million loan from several countries helped Mexico get bailed out. In 2001, Argentina defaulted on its debt with a loan of 132 billion dollars, the amount of which is considered one-seventh of all the money borrowed from the third world at that time. The move came after political and economic uncertainty led to the devaluation of Argentina's currency. The Argentine government froze all bank accounts for a year and allowed each person to withdraw a very small amount of money per week. Argentina subsequently borrowed money from the International Monetary Fund to repay its debt, but still suffers from a major depression. During the 2008 global financial crisis, Iceland defaulted on $85 billion of its international debt. The Central Bank of Iceland later attempted to bail out the nation's three largest lenders and ended up going bankrupt. The value of the Icelandic currency has collapsed. Extreme restrictions on transferring money out of the country and on IMF loans took Iceland out of one of the worst economic defaults in history. Various crises have led countries to default on their foreign debts. What will happen when a country defaults? Undoubtedly, a debt is a burden on a government, but what will happen when a country defaults? the country will not repay its debt? The results will be worse. When a country defaults on its debt, the effect on bondholders can be worse. This will affect pension reserves and investors with large amounts of holdings. The borrowed government will lose access to international capital markets in the event of default. It also will not be able to issue bonds to commercial banks or private bondholders and borrow money from them. This will ultimately force the country to have zero government deficits or create money to pay for deficits. It clearly will not be able to beat the debt or bond maturities and the country will most likely not be able to repay as no one will provide another loan. When during a default even private businesses and citizens of the borrowing country cannot obtain any foreign loan financing as they will not provide loans to the government or lend to companies. Above all, defaulting on foreign debt means shutting down that particular government's economy. The government must rely entirely on itself. This will result in pressure on the Central Bank to create money and produce inflation. When a government is extremely reliant on external financing, it runs out of money, just like its economy. The next horrible outcome is that that particular government's currency will be devalued due to lack of trust. But this will not cause a direct impact on its economy as it will lead major exporters to export more and import less, reducing the trade deficit. But indirectly, this will decrease the value of government assets such as buildings. They will become available to everyone and accessible even to strangers. The post-debt default results are extremely horrible and will take years to recover. Why does the International Monetary Fund receive preferential treatment? The purpose of the International Monetary Fund is to be the lender of last resort for failing countriesgoing through the financial crisis. All IMF loans are issued and repaid most of the time in dollars and euros. The following hypothetical example shows how the IMF acts as a lender of last resort. Country A is a developing nation with a resource-dependent economy and its exports are truly valuable and high-priced commodities. For this reason, Country A was able to obtain a loan to make long-term investments. 20% of the money borrowed goes to government spending, while 40% of government revenue comes from exports. Now, due to unavoidable circumstances, those high-value export goods have lost their value and the export numbers are not so satisfactory. As a result, government revenue fell by 20%. The second problem is that Country A's currency has been purchased all this time to buy exports and now, due to poor export performance, the currency has also lost value against the dollar and the euro. . This indirectly means that, when repaying foreign debt, Country A has to spend a larger share of its local currency to match the value of the borrowed debt. Government A is already struggling with lower revenues, but now must allocate more money from its tight budget to debt service. The trade deficit will be widened. Now government A must study the modalities. It could default on its external loans. Then come the worst results. Foreign direct investment will flow out of the country, ultimately adding a bad reputation to the country. A. now, what is the option left? YES. They will turn to the International Monetary Fund, asking for assistance. On the other hand, the International Monetary Fund is an organization designed to solve such problems. Once Country A requests assistance, the IMF will step in and provide multiple rounds of loans to the country under various strict conditions and agreements. It will also restructure the debts of Country A. Sometimes there are also chances that the IMF will convince lenders to forgive and write off a certain amount of debt. Further plans will also be structured to stabilize and strengthen the economy of the affected country and its devalued currency. Summary - Countries apparently do not want to damage their relationship with the International Monetary Fund by delaying a repayment, defaulting on their IMF loans, or failing to comply with certain IMF conditions. Countries always try to give special treatment to the IMF because they don't want to have a bad reputation with the world's lender of last resort. When you're in an economic crisis, when you're in a state where no country is willing to lend money, they just turn to the IMF. Even if the country has the worst reputation and has poor economic performance, the IMF continues to provide assistance to such countries according to certain guidelines. No one wants to treat a person who gives you a loan, no matter how much worse off you are. Effectiveness of the IMF Since its foundation, the IMF has carried out many projects and provided many services and assistance according to various criteria. The effectiveness of these programs varies from one to another. For most countries, the IMF has been a successful institution in reviving the economy during the crisis. At the same time, the International Monetary Fund also has its failures, being a widely criticized organization. Basically the International Monetary Fund has three main functions. It provides a basic economic health check for member countries, this is called surveillance. It also provides technical assistance and training and lends to member countries in times of difficulty. When countries face an economic crisis or..