International Financial Institutions

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  • Murthy Karanam asked: What happens when a country defaults on sovereign debt? Have IMF/World Bank bailouts so far helped or exacerbated the financial condition of the recipient countries?

    Rajeesh Kumar replies: A sovereign default occurs when a country fails to pay back its loan to domestic or international creditors. The International Monetary Fund (IMF) defines default as a breach of contract or broken promise. The most immediate impact of sovereign default is that borrowing cost rises for the government in the domestic and international bond market. The higher interest will impact the entire economy of the country, including the value of currency, banking system, stock market, corporate borrowing, etc.