Definition of Debt Default

What is meant by the term "debt default"? What happens in the event of a debt default?

When an individual, company or sovereign nation borrows money, there are usually legal obligations that have been set out in a debt contract.

For instance - a company may borrow money via a debt offering. In return, they agree to pay out a 10% interest payment per year to the lender, in addition to returning the principal after a ten year period.

If the company violates any of the terms of the agreement (for instance, they are unable to make an interest payment), then they are said to be in default. This type of a default is called a "debt services default".

There is an additional type of default that is called a "technical default". A "technical default" occurs when a covenant (condition) of a debt contract has been breached. For instance, a company may agree to maintain a certain amount of working capital. If they breach this "covenant", then they are said to be in default.

If a sovereign nation can't meet its legal obligations when it comes to servicing its debt, then it is said to be in default. A number of nations have defaulted on their debt over the past century.

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