Social consequences of defaults

: pp. 383 - 393
Lviv Polytechnic National University Department of Management and International Business
Lviv Polytechnic National University, Ukraine

The article examines the social consequences that a probable default can have for the country’s population, as well as the essence of the concept of "default", types of defaults, their causes and consequences for the country’s economy in the short and long term. If a default occurs, it becomes necessary to reduce the budget deficit, i.e. to increase revenues or reduce expenditures. But if the economic situation is difficult, then you should not expect more income. Accordingly, the country reduces spending, which means a reduction in social or investment programs of the state. As a rule, these are capital expenditures that can be reduced relatively imperceptibly for the population. However, the consequences become noticeable in the following periods, as the infrastructure in the country deteriorates. To analyze the consequences of default, three countries - Argentina, Mexico and Russia - were considered. The social consequences of defaults for these countries are suggested to be interpreted by such indicators as the moderate poverty index, the unemployment rate, GDP per employed person, and the Gini coefficient. A comparison of indicators of the level of poverty, unemployment and labor productivity in the period before and after the default was made for these countries. The consequences of Russia’s technical default in 2022 and the impact of sanctions packages on the country’s economy as a result of a full-scale invasion of Ukraine are also analyzed.

A state that has declared default will not be able to get new loans, and it loses the confidence of foreign investors. This will reduce the inflow of currency into the country, which will lead to the depreciation of the national currency. By the way, the currency reaching its peak values is a standard phenomenon for countries after the announcement of default. In addition, since the impossibility of obtaining new loans and attracting investments for business will make taxes the only source of filling the budget, social programs (in particular, subsidies), benefits and pensions will be the first to be cut.

At the same time, the default is accompanied by sharp inflation, which makes the goods of domestic exporters more competitive. If the country, after announcing the default, was able to get out of the crisis, and even better – its economy shows growth, then the default can be considered successful. The main task of the default for a certain time is to reduce the tax burden. However, it is necessary to understand several important things. Since, after the declaration of default, the inflow of foreign investments will either stop completely or will be greatly reduced, the correct distribution of taxes as the only source of filling the state budget is very important. The exchange rate of the national currency begins to fall, because the inflow of investments decreases. At the same time, some investors who invested or were going to invest in private companies in this country are trying to withdraw their dividends or abandon their investments. That is, there is a decrease in the exchange rate and a decrease in economic growth.

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