A: The failure to pay interest and principal on your debts when they come due.
Q: What's restructuring?
A: Working out easier terms, sometimes with less interest or at a later date than what was on your bonds, so that creditors get less than they were originally entitled to.
Q: How does restructuring occur?
A: Often governments ask their creditors, such as banks, pension and investment funds, to hand in, or tender, their bonds and get new ones in return. The new ones may have longer maturities and pay less interest.
Q: Why would anyone agree to that?
A: They don't happily. It's a matter for negotiation. Governments can sometimes be sued. Some bonds have clauses that say all creditors have to agree to a settlement if the majority do. That speeds things along.
Q: Why do this? After all governments can always raise taxes and cut spending.
A: They can, but that doesn't always dig them out of their hole. Raising taxes and cutting spending can hurt growth. If the economy is shrinking, the debt pile gets larger compared to the size of the economy. And tax revenues fall. Investors can see this and start refusing to lend or charging exorbitant interest. The existing bonds can't be rolled over when they're due.
Additionally, if the creditors are foreigners, voters often balk at seeing large amounts of their tax money shipped abroad.
Q: What about bailout loans, such as from the European Union or the International Monetary Fund?
A: Some countries manage with help. But bailout loans have to be repaid, too. The question is, whether the debts are so big the country has no reasonable chance to repay them.
Q:What happens to governments that do this?
A: Typically, they are cut off from borrowing on international bond markets for several years at least. Investors in general may abandon them for a while, hurting their economy in other ways.
Q: This happen often?
A: Between 1800 and 2009 there were 250 cases of default on foreign credit and 68 domestic defaults, according to authors Carmen M. Reinhart and Kenneth S. Rogoff in their book, "This Time Is Different: Eight Centuries of Financial Folly."
source: AP
