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Consequences of defaulting on sovereign debt and how Ruto saved Kenya

President William Ruto has received praise for saving Kenya from the consequences of defaulting on sovereign debt.

President William Ruto during a media interview at State House, Nairobi

Kenya is set to repay its first $300 million installment of the 2014 $2 billion Eurobond, despite speculations that the country was expected to default.

On Tuesday, Ethiopia became Africa's third country to default on debt, after failing to make a $33 million payment on its only international government bond.

Sovereign debt defaults occur when a country cannot pay its bills or repay its debt obligations, leading to technical bankruptcy.

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These defaults can have significant consequences on both the country's economy and the global financial landscape.

Sovereign defaults can be triggered by various factors, including:

High levels of debt - When a country has a high debt-to-GDP ratio, it may struggle to maintain debt sustainability, especially during economic downturns or global financial crises.

Rising borrowing costs - Higher interest rates can lead to increased borrowing costs for countries, making it more difficult for them to service their debt.

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.Poor economic conditions - A struggling economy can negatively impact a country's ability to service its debt, leading to default.

Political or economic mismanagement - Sometimes, sovereign defaults can be intentional, resulting from mismanagement or political decisions.

The consequences of sovereign debt defaults can include:

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Lower credit rating - A default lowers a country's credit rating, making it more expensive for the country to borrow in the future.

Economic hardship - Defaults can lead to economic downturns, reduced investment, and decreased living standards for the population.

Global impact - Sovereign defaults can have broader implications for the global economy, as they can affect the stability of financial markets and the ability of countries to service their debts.

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Some notable examples of countries that have defaulted on their sovereign debt include:

Zambia

In November 2020, Zambia became the first African country to default on its debt in the wake of the COVID-19 pandemic.

The country was in an International Monetary Fund (IMF) stabilization program, waiting for longer maturities, lower interest rates, or grace periods.

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Ghana

Ghana has also been in default since the end of 2022. The country underwent a major program of fiscal consolidation in exchange for a multi-billion-dollar bailout from the IMF.

Argentina

The country defaulted on its sovereign debt in 2001, and later in 2022, marking the largest sovereign default in history.

Greece

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In 2012, Greece faced the largest sovereign debt restructuring in history, following two years of economic hardship influenced by the global recession3

Venezuela

Venezuela has defaulted 11 times in modern history, with its most recent default occurring in 2023.

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