There's been a lot in the news about Greece and its debt problem. The foreign currency markets have been jittery about the European Union and whether the Euro as a currency will even survive. Just this last week, leaders of the European Monetary Union agreed on a "selective default" of Greece and authorized the buying back of securities from Greece if necessary. The whole situation has brought an interesting issue to the forefront. Namely - what is a default?
I've been saying all along that if a borrower cannot pay its debt such that he is late or the debt must be restructured then he is in default. The latter is what is up for debate. If debt is restructured is that considered a default? I would submit that if debt is restructured to avoid non-payment or late payment then it is default. The whole concept of default is meant to determine if a borrower can pay his debt. If he can't then the grade of his borrowing status declines and he must pay a premium to borrow in the future. He is in fact "sub-prime" in his grade because he has a history of late or non-payment. In the retail world, its equates to having a bad credit record and not being able to get loans at favorable interest rates.
In the world of government and currency markets, default of a country means that country cannot pay its debts and that its currency will become significantly devalued. The country will have difficult borrowing funds in the open market to fund its operations. Perhaps more importantly, foreign investors will not be investing in that countries securities and it will not be place of growth and investment.
There are perhaps gradations of default. If a borrower can pay its debt without drastic alterations to his loan terms then that obviously is not as bad as a borrower who must borrow in order to survive. So if a borrower must borrow in order to fund its operations does it mean it is in default? I'm not sure I would describe it as default, but I may describe it as an insolvent enterprise. Given that governments must borrow in order to fund its operations, its pretty obvious that we live in an insolvent country.