FINANCIAL CRISIS
1. 1. answer to the questions below: (Min 250 words) No quoting Answer based on knowledge of the topic
If a country goes bankrupt and cannot pay its debts, which of its responsibilities should take precedence: paying bondholders or paying the pensions of its employees?
2- Make constructive comment on each Response below: (betw 100-125words each)
Response 1
If the country goes bankrupt, it cannot pay its debt owned to both external and internal creditors. External debts are international bonds imposed by the government and sold to foreign borrowers, and internal debts are debts owed to others entities within the country. Printing more money and increasing taxes are the source of financing of internal debts, but external debts are paid from the resources received from all other sectors that generate revenues, and they must be paid using the foreign currency that the government cannot control. So, the country’s bankruptcy or default occurs when the country is unable to repay its debt, but it is different from many companies’ bankruptcy. One of the differences can be that in the case of the company’s bankruptcy, the assets are liquidated by creditors, but in the case of the country’s bankruptcy, the assets of the country cannot be liquidated, and the country cannot be forced to pay. So, the country defaults its debt, and the creditor’s only option is to renegotiate the terms of the loan. Government bonds will be rescheduled for delayed interest or will have their worth reduced.
Regarding the two scenarios in the question, paying bondholders should be prioritized over employees’ pensions, although nobody could dispute that both sectors are critical. However, not paying bondholders can lead to an increase in interest rates in the economy, leading to the reduction of credit availability. The result could be a crisis in the financial sector since the credit on which most of the operations have relied would be challenging to attain.
Response 2:
With a little research n Google I found out that when a corporation is liquidated in the United States, according to section “507” of the Bankruptcy Code there are mandates that creditors be paid in a certain order. Secured creditors, such as secured bondholders, are the first priority. Next in line are unsecured creditors, which typically include the company’s suppliers, employees, and banks to name a few. And finally, stockholders are last in line. The financial industry is one of the most essential areas of the economy since all other industries require money for their operations and manufacturing processes. Financial institutions also lend money to other industries which is why they play a big role in the economy. When credit becomes scarce, the economy’s consumption and investment spending suffer. Consumer spending has an impact on aggregate demand and production in the economy. In the case that bondholders are not paid, the economy will experience a higher rate of interest. This type of economic boom might lead to a decline in credit availability and a financial sector catastrophe. Any bank or financial sector crisis has the potential to spill over into other areas of the economy. As a result, failing to pay bondholders will take precedence, as failure to do so will have a direct impact on the economy. Failure to pay employees’ pensions will cause a drop in consumer spending and a rise in savings in the economy. If the savings do not go into investment, reduced consumer expenditure will boost production and employment in the economy.
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