In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan.^[1] Default may occur if the debtor is either unwilling or unable to pay their debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.

Distinction from insolvency and bankruptcy[link]

The term default should be distinguished from the terms insolvency and bankruptcy.

• "Default" essentially means a debtor has not paid a debt which he or she is required to have paid.
• "Insolvency" is a legal term meaning that a debtor is unable to pay his or her debts.
• "Bankruptcy" is a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default.

Types of default[link]

Default can be of two types: debt services default and technical default. Debt service default occurs when the borrower has not made a scheduled payment of interest or principal. Technical default occurs when an affirmative or a negative covenant is violated.

Affirmative covenants are clauses in debt contracts that require firms to maintain certain levels of capital or financial ratios. The most commonly violated restrictions in affirmative covenants are tangible net worth, working capital/short term liquidity, and debt service coverage.

Negative covenants are clauses in debt contracts that limit or prohibit corporate actions (e.g. sale of assets, payment of dividends) that could impair the position of creditors. Negative covenants may be continuous or incurrence-based. Violations of negative covenants are rare compared to violations of affirmative covenants.

With most debt (including corporate debt, mortgages and bank loans) a covenant is included in the debt contract which states that the total amount owed becomes immediately payable on the first instance of a default of payment. Generally, if the debtor defaults on any debt to the lender, a cross default covenant in the debt contract states that that particular debt is also in default.

In corporate finance, upon an uncured default, the holders of the debt will usually initiate proceedings (file a petition of involuntary bankruptcy) to foreclose on any collateral securing the debt. Even if the debt is not secured by collateral, debt holders may still sue for bankruptcy, to ensure that the corporation's assets are used to repay the debt.

There are several financial models for analyzing default risk, such as the Jarrow-Turnbull model, Edward Altman's Z-score model, or the structural model of default by Robert C. Merton (Merton Model).

Sovereign defaults[link]

Sovereign borrowers such as nation-states generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences. One example is with North Korea, which in 1987 defaulted on some of its loans. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments.^[2] In the 1998 Russian financial crisis, Russia defaulted on its internal debt (GKOs), but did not default on its external Eurobonds. As part of the Argentine economic crisis in 2002, Argentina defaulted on $1 billion of debt owed to the World Bank.^[3]

Orderly defaults[link]

In times of acute insolvency crises, it can be advisable for regulators and lenders to preemptively engineer the methodic restructuring of a nation's public debt- also called "orderly default" or "controlled default".^[4][5] Experts who favor this approach to solve a national debt crisis typically argue that a delay in organising an orderly default would wind up hurting lenders and neighboring countries even more.^[6]

Strategic default[link]

When a debtor chooses to default on a loan, despite being able to service it (make payments), this is said to be a strategic default. This is most commonly done for non-recourse loans, where the creditor cannot make other claims on the debtor; a common example is a situation of negative equity on a mortgage loan in common law jurisdictions such as the United States, which is in general non-recourse. In this latter case, default is colloquially called "jingle mail" – the debtor stops making payments and mails the keys to the creditor, generally a bank.

Sovereign strategic default[link]

As with Strategic default when a debtor chooses to default on a loan sovereign borrowers such as nation-states also can choose to default on a loan. Ecuador's president Rafael Correa in 2008 had given the order not to approve a debt interest payment.^[7] See also Odious debt.

Consumer default[link]

Consumer default frequently concern arrears in rent or mortgage payments, consumer credit, or utility payments. A European Union wide analysis identified certain risk groups, such as single households, being unemployed – even after correcting for the (significant) impact of having a low income -, being young (especially being younger than around 50 years old, with somewhat different results for the New Member States, where the elderly more often at risk as well), being unable to rely on social networks, etc. Even internet illiteracy has been associated with increased default, potentially caused by these households being less likely to find their way to the social benefits they are often entitled to. While effective non-legal debt counseling is usually the preferred -more economic and less disruptive- option, consumer default can end-up in legal debt settlement or consumer bankruptcy procedures, the last ranging from 1-year procedures in the UK to 6-year procedures in Germany.^[8]

See also[link]

• Default notice

References[link]

Bibliography[link]

• de Servigny, Arnaud and Olivier Renault (2004). The Standard & Poor's Guide to Measuring and Managing Credit Risk. McGraw-Hill. ISBN [[Special:BookSources/0-07-141755-6|0-07-141755-6]]. 
• Duffie, Darrell and Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. ISBN 0-691-09046-7. 
• Firzli, M. Nicolas J. (2010). Greece and the Roots the EU Debt Crisis. The Vienna Review. ISBN 0-7910-2939-5. 
• Lando, David (2004). Credit Risk Modeling: Theory and Applications. Princeton University Press. ISBN [[Special:BookSources/0-691-08929-4|0-691-08929-4]]. 

Look up default in Wiktionary, the free dictionary.

Default may refer to:

• Default (law), the failure to do something required by law
  • Default judgment
• Default (finance), failure to satisfy the terms of a loan obligation or failure to pay back a loan
• Default (computer science), a preset setting or value
• Default (band), a Canadian post-grunge and alternative rock band
• defaults (software), a command line utility for plist (preference) files
• Default logic, a non-monotonic logic proposed by Raymond Reiter

This disambiguation page lists articles associated with the same title. If an internal link led you here, you may wish to change the link to point directly to the intended article.

Mario Draghi
President of the European Central Bank
Incumbent
Assumed office 1 November 2011
Vice President	Vítor Constâncio
Preceded by	Jean-Claude Trichet
Governor of the Bank of Italy
In office 16 January 2006 – 31 October 2011
Preceded by	Antonio Fazio
Succeeded by	Ignazio Visco
Chairperson of the Financial Stability Board
In office 2 April 2009 – 4 November 2011
Preceded by	Position established
Succeeded by	Mark Carney
Personal details
Born	(1947-09-03) 3 September 1947 (age 64) Rome, Italy
Alma mater	Sapienza University of Rome Massachusetts Institute of Technology
Signature

Mario Draghi (Italian pronunciation: [ˈmaːrjo ˈdraːɡi]; born 3 September 1947) is an Italian banker and economist who succeeded Jean-Claude Trichet as President of the European Central Bank on 1 November 2011.^[1] He was previously the governor of the Bank of Italy from January 2006 until October 2011.

Biography[link]

He was born in Rome, Draghi graduated from La Sapienza University of Rome under the supervision of Federico Caffè, then earned a PhD in economics from the Massachusetts Institute of Technology in 1976 under the supervision of Franco Modigliani and Robert Solow. He was full professor at the Cesare Alfieri Faculty of Political Science of the University of Florence from 1981 until 1994^[2] and fellow of the Institute of Politics at the John F. Kennedy School of Government, Harvard University (2001).

From 1984 to 1990 he was the Italian Executive Director at the World Bank. In 1991, he became director general of the Italian Treasury, and held this office until 2001. During his time at the Treasury, he chaired the committee that revised Italian corporate and financial legislation and drafted the law that governs Italian financial markets. He is also a former board member of several banks and corporations (Eni, Istituto per la Ricostruzione Industriale,^[3] Banca Nazionale del Lavoro and IMI).

Draghi was then vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002–2005).^[4]

Draghi is a trustee at the Institute for Advanced Study in Princeton, New Jersey and also at the Brookings Institution, in Washington, D.C.

In his capacity as Bank of Italy governor, he was a member of the Governing and General Councils of the European Central Bank and a member of the Board of Directors of the Bank for International Settlements. He is also governor for Italy on the Boards of Governors of the International Bank for Reconstruction and Development and the Asian Development Bank. In April 2006 he was elected Chairman of the Financial Stability Forum, which became Financial Stability Board in spring 2009.

ECB[link]

Candidacy[link]

Draghi was frequently mentioned as a potential successor to Jean-Claude Trichet, whose term as President of the European Central Bank ended in October 2011.^[5] Then, in January 2011, German weekly newspaper Die Zeit reported, with reference to high-ranking policy-makers in Germany and France, that it is "unlikely" that Draghi will be picked as Trichet's successor.^[6] However, in February 2011 the situation became further complicated when the main German candidate, Axel Weber, was reported to be no longer seeking the job, reviving the chances of the other candidates.^[7] On 13 February 2011 Wolfgang Münchau, associate editor of the Financial Times, endorsed Draghi as the best candidate for the position.^[8] A few days later The Economist wrote that "the next president of the world’s second-most-important central bank should be Mario Draghi".^[9] On 20 April 2011 The Wall Street Journal reported that "Wolfgang Schäuble, Germany's finance minister, is open to Mr. Draghi for the post of ECB President".^[10] A few days later the German newspaper Bild endorsed Draghi by defining him the "most German of all remaining candidates".^[11] Contrary to previous reports about France's position, on 25 April it was reported that President Nicolas Sarkozy saw Draghi as a full-fledged and an adequate candidate for the job.^[12][13]

On 17 May 2011 the Council of the European Union – sitting as Ecofin – adopted a recommendation on the nomination of Draghi as President of the ECB.^[14] He was approved by the European Parliament and the ECB itself^[15] and on 24 June 2011 his appointment was confirmed by the European leaders.^[16] Draghi began leading the Frankfurt-based institution when Trichet's non-renewable eight-year term expired on 31 October 2011. Draghi's term runs from 1 November 2011 to 31 October 2019.^[17] Though France long backed Draghi's candidacy, the country held up the appointment toward the end, insisting that Lorenzo Bini Smaghi, an Italian official on the ECB's six-member board, cede his post on the board to a French representative.^[16]

Concerns were also expressed during the candidacy about Draghi's past employment at Goldman Sachs.^[4][18] Pascal Canfin (MEP) asserted Draghi was involved in swaps for European governments, particularly in Greece, trying to disguise their countries' economic status. Draghi responded that the deals were "undertaken before my joining Goldman Sachs [and] I had nothing to do with them", in the 2011 European Parliament nomination hearings.^[19][20]

Presidency[link]

In December, 2011, Draghi oversaw a €489 billion ($640 b.), three-year loan program from the ECB to European banks. The program was around the same size as the US Troubled Asset Relief Program (2008) though still much smaller than the overall US response including the Federal Reserve's asset purchases and other actions of that time. Draghi's ECB also promptly "repealed the two foolish rate hikes made by his predecessor ...Trichet [and] ... stepped up the bond purchases from struggling euro-zone nations" to help with the debt crisis, commentator Steve Goldstein wrote in mid-January, 2012. At that time, "Draghi and all of his colleagues (the decision was unanimous) chose not to cut the price for private-sector loans [below the 1% achieved with the "repeal"], even when he forecasts inflation to fall below the targeted 2% later this year." As such, Goldstein concluded, Draghi would leave more moves to national leaders Sarkozy and German Chancellor Angela Merkel and central banks, contrasting Draghi's actions with those of the Fed's Ben Bernanke.^[21]

In February 2012, Nobel prize laureate in economics Joseph Stiglitz argued that, on the issue of the impending Greek debt restructuring, the ECB's insistence that it has to be "voluntary" (as opposed to a default decreed by the Greek authorities) was a gift to the financial institutions that sold credit default insurance on that debt; a position that is unfair to the other parties, and constitutes a moral hazard.^[22]

Late in February, 2012, a second, somewhat larger round of ECB loans to European banks was initiated under Draghi, called long term refinancing operation (LTRO). One commentator, Matthew Lynn, saw the ECB's injection of funds, along with Quantitative easing from the US Fed and the Asset Purchase Facility at the Bank of England, as feeding increases in oil prices in 2011 and 2012.^[23]

Awards and honors[link]

• 2000 Knight grand cross OMRI^[24]
• 2009 honorary distinction in Statistics (University of Padua)^[25]
• 2010 honorary Master in Business administration (Vicenza, CUOA Foundation)^[26].

References[link]

External links[link]

Wikimedia Commons has media related to: Mario Draghi

• Profile (includes photo) at the European Corporate Governance Institute Website
• European Central Bank
• Banca d'Italia
• Financial Stability Board

v t e Executive Board of the European Central Bank Mario Draghi (president)  · Vítor Constâncio (vice-president) José Manuel González Paramo  · Benoît Cœuré  · Jörg Asmussen  · Peter Praet former members: Wim Duisenberg  · Christian Noyer  · Sirkka Hämäläinen  · Eugenio Domingo Solans  · Tommaso Padoa-Schioppa  · Otmar Issing  · Jürgen Stark Lucas Papademos  · Gertrude Tumpel-Gugerell  · Jean-Claude Trichet