In finance, default refers to the inability of an entity to meet its obligations. Since it is bad for both the borrower and the lender, they try to prevent him in every possible way. Technical default is what, for example, happened in the summer in Greece. Its main difference from the usual one is the hope for a happy outcome in the future. If we say what technical default is, in simple terms, then it represents a situation where the borrower, although it cannot timely respond to its obligations, but expects to do so in a certain perspective. But there are many nuances that will be discussed in this article.
general information
Default - this is the inability to repay the borrowed money on time to the lender or to continue to regularly pay interest. For example, a person took a house on a mortgage, and it turned out to be an excessive burden. Suppose he declares a technical default. What are these simple words? When this person, realizing the burden of his burden at this particular moment in time, asks for a reprieve from the bank that provided the loan for the house. A similar situation can occur with any commercial organization or state. Default means that they can no longer answer for their obligations. For example, they cannot pay bonds issued in due time to increase capital. Technical default is a temporary situation that only threatens to develop into a catastrophe. She often comes against the will of the borrower. But both sides are still hoping for a favorable resolution.
Types of default
The most sensational case of recent bankruptcy is the fate that befell Lehman Brothers Bank. The private default of this company occurred due to its inability to pay $ 600 billion to its creditors. Another famous incident occurred with Greece. Sovereign default in this country occurred in March 2012. The amount of debt at that time was 138 billion US dollars. In the summer of 2015, a default was declared technical. This means that Greece was unable to cope with the economic situation in the country and demanded that the IMF write off part of its monetary obligations.
Insolvency differences
Before moving on to the story of what technical default is, in simple terms, you need to understand the terminology. It is important to understand the difference between the two conditions - insolvency and bankruptcy. Default essentially means a situation where the borrower did not repay the loan, when he should have done so. It has two main types: technical and ordinary. We will talk about a whole series of forms that it can take. Insolvency and bankruptcy are legal terms. The first means that the borrower is in a situation where he will not be able to answer for his obligations.
Bankruptcy Features
Insolvency precedes default. The situation is already being recognized, but the negative outcome has not yet arrived. Technical default is a more joyful option when the possibility of paying a debt is still being considered, but is postponed for the future. In this case, the borrower and the lender have some prerequisites to consider that the economic condition of the former has good chances to improve. And finally, bankruptcy. This is also a legal term. It means that there are legal grounds for establishing judicial supervision of the financial affairs of an insolvent entity.
Technical default: what is it in simple words?
We have already figured out the basic terminology, now it's time for the real subject of our article. There are two types of default: debt servicing and technical. The first, as we have already found out, comes at a time when the borrower cannot make the planned payment due to his own financial problems. Technical default means that the clause of the agreement is violated. Affirmative obligations require a firm to maintain a certain level of capital or financial performance. The most common are violations of the terms of retained earnings, short-term liquidity and debt servicing. Negative obligations are conditions in contracts that restrict or prohibit the company from taking certain actions (for example, selling an asset, paying dividends). Most agreements have a clause according to which insolvency on any other debt automatically leads to default on all others.
