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What happens to consumer debt if a country defaults on its debt? Also, how will a debt default by a country affect government-backed loans such as mortgages and student loans?

  • I imagine that it wouldn't affect consumer debt significantly. Individuals are separate entities from their government like how stockholders are separate entities from a corporation. It would probably make it harder for the country to raise money through bonds. Who wants to purchase bonds from a country that won't pay you back? – Greg Jul 7 '11 at 16:54
  • Greg, you should add this as an answer rather than as a comment. I think your answer is correct, and would have voted it up. – ChrisInEdmonton Jul 7 '11 at 18:28
  • @ChrisInEdmonton - Added as answer below – Greg Jul 9 '11 at 4:39
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Usually when the government defaults, the currency gets devalued. So as a debtor, that's a good thing -- your debt gets devalued.

The "catch" is that your income and buying power is also devalued. So unless you happen to own the type of assets that become more valuable during those circumstances (real property, farms, utilities, certain industrial things, etc) you're looking at tough times ahead.

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What happens to consumer debt if a country defaults on its debt?

Nothing, just as nothing happens to your debt when your neighbor defaults. If you have debts that have floating interest rates - those may (and probably will) hike.

how will a debt default by a country affect government-backed loans such as mortgages and student loans?

Those that are already closed will probably not be affected, as you've got the money already and signed the loan agreement. Those that are not closed - will probably be delayed or not funded at all.

However, if any of the debts allows the debtor to request an early collection (which I think is rather rare on the consumer market) - someone else's default may lead to the debtor's request for the money earlier than expected.

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If the government defaults on its debt, the holders of the debt get hung out to dry.

You'll personally still owe just what you owed before, but the risk profile for the lender just shot up through the roof if the debt they hold is government-backed.

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I imagine that it wouldn't affect consumer debt significantly. Individuals are separate entities from their government like how stockholders are separate entities from a corporation. It would probably make it harder for the country to raise money through bonds. Who wants to purchase bonds from a country that won't pay you back?

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