Perspectives · Bonds · 2026

What happens when a government cannot pay

A company that cannot pay its debts goes through a legal process. A government cannot be wound up in the same way, so a sovereign default is settled by negotiation between the government and its creditors, which may include bondholders, other governments and international institutions.

The archive describes Argentina in 2020, which reached a deal with bondholders within three months of its default, and Sri Lanka in 2022, where the process took considerably longer. Terms usually include lower payments, longer maturities or a reduction in what is owed.

Investors in government bonds of weaker countries are paid extra for this risk. How a bond is governed, in which law and with which clauses, affects how a restructuring goes.

General information only; not investment advice. Read the risk warning.