What is a moratorium? Meaning and cases of moratorium | Economic Word

Moratorium Declaration: Meaning and Examples

 

 

Meaning and Definition of Moratorium

 

Moratorium originates from the Latin word "Morari" meaning to delay, and it refers to when a country postpones payment on external debts.

In simpler terms, it means, "We'll pay the money eventually, but we don't have it right now, so please wait."

Repayment of debt is not only about the amount but also about adhering to the timing. Since a moratorium unilaterally postpones the repayment period by the debtor country, it inevitably leads to a decline in the country's international credit rating. While declaring a moratorium can help avoid outright default, where payments on bonds are completely "halted," it essentially publicly acknowledges the debtor country's lack of capital, which is not much different from default.

On a deeper level, this can lead to a severe economic crisis, potentially resulting in a sovereign bond crash. Government-issued bonds typically offer low investment returns based on high safety, but a moratorium poses a serious threat to this high safety, potentially leading to skyrocketing bond yields and plummeting bond values.

 

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Examples of Moratorium

 

While France was the first to declare a moratorium, one of the most famous instances is the German moratorium following World War I. After losing in World War I, Germany was required to pay astronomical reparations to the Allied Powers. However, having exhausted its economy through total war efforts, Germany had no means to come up with such funds. Germany attempted to cover the reparations through various means, including installment payments and contributions from several ministries. However, with the German economy already in ruins and hyperinflation escalating, it eventually led to the declaration of a moratorium.

In the 1990s, Russia also declared a moratorium. The Russian financial crisis of 1997 led to capital flight and a collapse in the value of the ruble, prompting Russia to declare a moratorium in 1998. At that time, due to the Russian moratorium, South Korea's bond was also included in the deferral list, amounting to $1.9 billion.

Additionally, following the global economic crisis triggered by the 2009 U.S. subprime mortgage crisis, Dubai declared a moratorium. At that time, Dubai, which heavily relied on external funding for most of its capital, faced a catastrophe due to the subprime mortgage crisis. Eventually, on November 26, 2009, Dubai World, a Dubai government-owned company, declared a moratorium.

In the case of North Korea, while it has been in a moratorium state since the Soviet era, the recent use of the term "moratorium" by North Korea is closer to its literal meaning of "deferment." North Korea extended the moratorium declaration to cover the postponement of nuclear tests and ICBM launches announced in April 2018.

 

 

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Meaning of moratorium