How does a country that is unable to meet its obligations to another country pose a...

How does a country that is unable to meet its obligations to another country pose a threat to international financial stability? What are the implications if such a country has no viable source from which to borrow the funds it needs to meet its obligations?

Expert Solution

A country that is unable to meet its obligations to another country pose a threat to international financial stability as it can lead to debt crisis on a large scale. When a country is not able to meet its obligations to another country then the country which was supposed to receive money will face liquidity problems either on a short term basis or a long term basis. This will have a multiplier effect as this country, in turn, might have payables due to several other countries. The chain of events will encircle several countries and will eventually turn into a large scale financial crisis undermining international financial stability.

If such a country has no viable source from which to borrow the funds it needs to meet its obligations then there can be long term implications for the country and the global economy as well. A chain reaction will be triggered and there will be dominos effect in which weaker economies will struggle. Even the well developed economies will reel under the pressure.

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