Table of ContentsExplaining Strom Thacker's ArgumentWhy Do Countries Default? What will happen when a country defaults? The effectiveness of Michael Tomz's IMF theory can be argued in both positive and negative ways. If a private bondholder or commercial bank bases a country's reputation on its external image, self-image, and other global market factors, most countries will have a bad reputation. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay If we take Iraq as an example, it has been placed as the least reputable country for almost a decade by RepTrak annual reports. RepTrak reports are compiled annually based on each country's external and personal image as well as the factors they obtain from global markets. Below is the reputation report from 2017 and 2015. Iraq's economy has been hit by its civil war, falling oil prices and political instability. . Their economy has been hit hard. But when they issued bonds in 2017, investors rushed to buy Iraq's first independent bond sale in more than a decade. USD 6.6 billion in orders were placed to purchase USD 1 billion of bonds, which will mature in 2023. All of these bonds were 100% guaranteed. % by the United States government. In fact, the yield was set lower than initial price expectations. Apparently, reputation was not taken into account by bondholders who purchased bonds from these countries. This could be because Iraq is largely dominated by the oil sector and its oil exports have gradually increased thanks to its new pipeline and catering facilities. Even though Iraq does not have a good reputation for ensuring repayment, it has its own oil sector and resources, which countries around the world have their eyes on. The second country is Greece. Its economy recorded a growth rate of just 0.01% in 2016. It is also a country that has undergone multiple bailouts from the European Union and the International Monetary Fund. Greece remains below European regions and even among global averages. The 2008 financial crisis seriously affected the Greek economy. Their unemployment rate still remains high. But when they issued their first Greek bond in three years in 2017, they sold five-year government bonds for 3 billion euros and, of course, investors and bondholders bought those bonds willingly, despite Greece's abysmal credit ratings and leadership position. It is the only country to miss a repayment to the International Monetary Fund. Indeed, demand for the debt exceeded 6.5 million euros, which ultimately resulted in turning away investors. In this line, the third country is Argentina. In June 2017, Argentina borrowed $2.75 billion in 100-year bonds at an 8% yield, despite its long history of sovereign defaults. It is worth noting that since its independence in 1816, Argentina has defaulted on its sovereign debts eight times. Including the largest default in the world was that of Argentina in 2001 on 100 billion dollars of bonds. Looking at these three countries, it can be said that reputation or repayment history clearly did not matter to investors, commercial banks or private bondholders. If they had, all those bond salesshould have taken place. But what is remarkable is that there are also some examples of reputation loans. There have been a number of incidents of countries failing to borrow the expected amount by issuing sovereign bonds. A US bond auction in March 2018 failed to attract the required demand. . This was a $21 billion bond auction. Bond traders and private bondholders have backed away from lending to America as its budget deficit has widened alongside federal reserves raising interest rates. Even China failed to achieve a result in a bond auction in June 2015, due to rising interest rates. yields. In 2011, Germany failed in its bond auctions by attracting weaker applications. It sold for $4.92 billion out of €6 billion in 10-year auctions. The average yield was 1.98%. These bond auction failures occurred simply because of the economic instability of the borrowing country. Explaining Strom Thacker's Argument. Established in 1945, the International Monetary Fund is an organization whose primary mission is to monitor and maintain international monetary systems. . This was a major economic turning point for many countries. It promoted global economies and stabilized the global monetary system. Although the IMF claims to stick to universalist criteria when designing an agreement with the borrowing country, in reality, individual governments exercise power over IMF lending decisions. Storm Thacker's argument can hardly be proven. This is false because the United States exerts influence beyond a certain point over IMF lending decisions. The IMF is financed by its member countries, in which the United States has 17.46% of the quota with a voting power of 16.52%, apparently a significant quota. owner. The IMF's decision-making structure gives the United States more power than any other member government. In May 2009, U.S. officials put pressure on the IMF to delay providing a $1.9 billion loan to Sri Lanka, accusing the country of not being able to implement strategic reforms. In March 2017, Donald Trump's administration put pressure on the IMF to refrain from participating in the Greek bailout plan. A bill was also introduced calling on the Trump administration to oppose any further IMF participation in the Greek bailout plan. The bill further required the United States to oppose any further IMF reforms until Greece repaid all its debts to the IMF. During the same period, the IMF sent a team to Athens to negotiate with the government, but the IMF was talking hard. and refused to commit funds due to the influence of the new US administration. Apparently the United States has influence over the IMF. Why are countries failing? Sometimes countries default on their external debt when the borrowing government is unable to repay its debts. Defects can occur for various reasons. In some cases, the government may have missed a loan repayment or it may also be a case of late disbursement. Global capital inflows play an important role in a country's default. In boom times, countries borrow money from financial centers or institutions offering greater promises of returns. But as a coin, every situation has two sides. Countries do notcannot rely on the responsibility of positive environments. A simple bank failure can interrupt a country's entire trade. A crisis in the cycle of capital flows can lead a country to default on its debt. Argentina, Greece, Russia, Pakistan and Venezuela are some of the countries that have defaulted in recent years. Looking at famous and recent defaults, Mexico defaulted. on its foreign debts following the peso crisis of 1994. The Mexican government was forced to buy U.S. dollars in devalued pesos, in an attempt to repay Mexico's national debts. Later, an $80 million loan from several countries helped Mexico get bailed out. In 2001, Argentina defaulted on its debt on a $132 billion loan, the amount believed to be one-seventh of all the money borrowed by the Third World at the time. This decision came after political and economic uncertainty determined the devaluation of the Argentine currency. The Argentine government froze all bank accounts for a year and allowed each person to withdraw a very small amount of money per week. Argentina then borrowed money from the international monetary fund to pay off its debt, but it still suffers from a deeper depression. During the 2008 global financial crisis, Iceland defaulted on $85 billion of its international debt. Iceland's Central Bank then attempted to bail out the country's three largest lenders and ended up bankrupting itself. The value of the Icelandic currency fell. It took extreme restrictions on the movement of money out of the country and on IMF loans to pull Iceland out of one of the worst economic defaults in history. Various crises have led countries to default on their external debts. What will happen when a country defaults? Undoubtedly, a debt is a burden on a government, but what will happen when a country fails to repay its debt? The results will be worse. When a country defaults on its debt, the effect on bondholders can be worse. This will affect retirement reserves and investors with large holdings. The borrowed government will lose access to international capital markets in the event of default. Additionally, it will not be able to issue bonds to commercial banks or private bondholders and borrow money from them. This will ultimately force the country to have a zero public deficit or to create money to pay for the deficits. Obviously, it will not be able to meet the debt or obligation maturities and, most likely, the country will not be able to repay since no one will provide another loan. When in case of default, even private companies and citizens of the borrowing country cannot get any foreign loan. financing because they will not provide loans to the government or businesses. Above all, defaulting on foreign debt means shutting down that particular government's economy. The government must rely entirely on itself. This will put pressure on the Central Bank to create money and produce inflation. When a government relies heavily on external financing, it becomes cash-strapped, as does its economy. The next horrible outcome is that this particular government's currency will be devalued due to a lack of confidence. But this will not have a direct impact on its economy, as major exporters will export more and import less, reducing the trade deficit. But indirectly, it will lower the value of government assets such asbuildings. To a certain extent they will become accessible to everyone and affordable, even for foreigners. The results after defaulting are extremely horrible and will take years to recover from. Why does the International Monetary Fund benefit from privileged treatment? The goal of the International Monetary Fund is to be the lender of last resort for countries experiencing a financial crisis. All IMF loans are issued and repaid mostly in dollars and euros. The hypothetical example below shows how the IMF acts as a lender of last resort. Country A is a developing country with a resource-dependent economy and its exports are a truly valuable and very expensive commodity. Thanks to this, country A was able to obtain a loan in order to make long-term investments. 20% of this borrowed money is for government spending, while 40% of government revenue comes from exports. Today, due to unavoidable circumstances, these valuable export products have lost their value and the export figures are not so satisfactory. As a result, government revenue fell by 20%. The second problem is that Country A's currency has been bought all this time to buy its exports and now, due to poor export performance, the currency has also lost its value against the dollar and the euro. . This indirectly means that, when repaying its external debt, country A must spend more of its local currency to equalize the value of the borrowed debt. Government A is already facing declining revenue, but now it must spend more money from its reduced budget on debt service. The trade deficit will widen. Government A must now think about the means. It could find itself in default on its external loans. Then come the worst results. Foreign direct investments will leave the country, which will eventually add a bad name to country A. Now, what option are we left with? Yes. They will turn to the International Monetary Fund for help. On the other hand, the International Monetary Fund is an organization intended to solve these problems. Once Country A requests assistance, the IMF will step in and provide several periods of loans to the country under various strict conditions, arrangements and agreements. This will also restructure country A's debts. Sometimes there are also chances that the IMF will convince the lenders to write off and write off a certain amount of debt. It will also structure other plans aimed at stabilizing and strengthening the affected country's economy and its devalued currency.Summary - Apparently, countries do not want to damage their relationship with the International Monetary Fund, by delaying a repayment, making default on their IMF loan or by not obligating the International Monetary Fund. under certain IMF conditions. Countries always try to give special treatment to the IMF because they do not want to have a bad reputation with the world's lender of last resort. In times of economic crisis, when no country is willing to lend money, they simply go to the IMF. Even if the country has the worst reputation and has poor economic performance, the IMF still provides aid to these countries according to certain guidelines. No one wants to treat a person who will give you a loan, even if you are worse off. Effectiveness of the IMF Since its establishment, the IMF has carried out numerous projects and provided numerous services and assistance according to various criteria. The effectiveness of these programs varies from one to another. For most countries, the IMF has been an effective institution in informing..