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Showing posts with the label debt crisis

What is an escrow account?

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An escrow account is an account managed by a bank and dedicated to a special purpose - for example, the 'bail-out fund' created by the European Union to refinance member states. If Portugal did not have the funds to repay it debts, it could (temporarily) avoid credit default by drawing funds from the escrow account. That might work for the smaller economies. But for Italy? Or France? Who will finance this safety net? And if they money was needed, would this mean a severe  haircut  for those funding the escrow account?

What is a debt default?

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To default on a debt is to stop repaying it. A sovereign debt default is when a country cannot make an agreed repayment on money it owes - as happened to Argentina in the early 1990s, for example. An early sign of a possible default is when the credit rating agencies downgrade the credit rating of the country concerned to 'junk bond status' - see here for a brief description (with audio) of what this means. What is a debt default? (mp3) What happens when a country defaults? Usually the national currency falls in value and this helps to make the goods of country concerned more affordable. International institutions like the IMF also arrange repayment plans or write offs/markdowns of debt. Why would a Greek default be such a big deal? It's a small country! 1. Because it owes massive amounts to some of the biggest European banks. They will lose money or 'have a hair cut' as financial traders put it. 2. Greece cannot devalue i