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According to BBC News, global stock markets tumbled after Greece’s debt was downgraded to “junk” by rating agency Standard & Poor’s over concerns that the country may default.
As uncertainty of whether Greece will get financial support from EU and IMF to clear up its looming debt increases, many rating agency such as Standard & Poor’s has rated Greek bonds as junks, rubbish.
What does it mean when a rating agency says that now Greek bonds are ‘junk’? It means that it is now very risky to invest on. It is mainly because of Greek’s apparent lack of ability to pay its bills. So there is a higher chance that an investor will lose money for investing in a country falling into the abyss of ever increasing debt.
Greece’s finance ministry said in a statement that the downgrade “does not correspond with the real data of the Greek economy.” Greek finance ministry denies that the down-rating doesn’t reflect the real Greek economy, however, this incident showed investor’s distrust toward the Greek economy.
If Greece does not take action to reduce debt and get help from the EU and IMF, it may default.
What’s default and what happens if a country defaults?
Lets look into what the definition of default is. Default is simply announcing that you cannot pay the debt in the due date. It doesn’t mean that the government will go bankrupt and the debt wouldn’t go away. The debt will always be there and the investors/lenders will demand you to repay the debt whenever possible.
What are the consequences of a country defaulting? There are several effects to this. First of all, the currency of the country becomes a rubbish or a paper tower (or no better than a paper tower). Foreign investors will have distrust against the currency of the defaulted country and the value of the currency will drop significantly. As the value of the currency goes down, it makes the imported goods insanely expensive, which will lead to inflation and shortage of necessary goods. If a country has high food dependency on importing, many people will starve to death as there are simply shortage of food due to expensive importing.
People will loose confidence and the recession or more like disintegration of economy will be in a vicious circle. So by this stage, there is ultimately nothing a country can do to recover. So Greece should get help from EU and IMF quickly by giving them confidence that they can pay back the borrowed money.