What happens if a country fails to pay back a loan (defaults) from the IMF?
Governments are like drunken monkeys. They always run the show in deficit and need a constant shot of debt. As long as they play by the rules, money keeps coming in to pay the deficit. However, the moment they attempt to default to their most powerful lenders, everything stops. Argentina and other countries that boldly declared that they would not pay to the IMF had to eventually kneel down and pay the loan with interest. Greece recently said they would "squeeze blood out of a stone" to repay the debt.
Here is what happens to a country that messes with the IMF:
- Everyone else stops lending to that country. That would force the government to drastically cut back on expenses, leading to domestic riots.
- Foreign investors would quit the stock markets and eventually even direct investments would vanish. That would ransack the stock markets and destroy domestic companies. More unemployment and more riots.
- The currency would fall like a rock. Here is how gold and US dollar rose against the peso after its default in 2001.
- When the currency falls that rapidly, the country would be unable to import essential goods. That would mean scarcity, poverty and riots.
- Inflation would rapidly increase destroying savings and destroying wealth. More riots.
- The riots and scarcity would destroy whatever remaining local companies.
- The riots, currency and everything else would make the country and its leaders laughing stocks of the world.
Here are some nations in the past that defaulted. All of their economies were ransacked and in the future if they want to grow they have to repay that loan. IMF never forgets its debt.
Anyone who has been lending money for a long time has a bunch of things to keep their show running. Just as the hitmen hired by your local pawnbroker, IMF's economic hitmen would send a defaulting economy to stone age.
Ultimately they paid the IMF in full. Everyone pays. If you want to play in the international economy, if you want to have credit, if you want to have any kind of normal relationship with the outside world, you need to have a normal relationship with the IMF.
..If you don't pay back the IMF, the lender of the last resort to the world, then no one will lend you money. I mean really, no one.