Relation Between Country And Bank Default

drftr | Dec 25, 2013 | 5 posts since 2013

Hello,

I'm trying to open HSBC accounts in Brazil, Turkey, India and Indonesia to buy CDs in local currencies but without the exchange risk (as I won't be forced to convert to dollars at maturity when holding the money in a savings account or buy a new CD).

I'm wondering though how strong the relation is between a possible country default and the default of a local HSBC bank, assuming that the last type of default but NOT necessarily the first type of default puts my money at risk.

Is there any information available on this subject? And is my last assumption correct or am I overlooking something?

Tnx!

drftr

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Answers

Shorebreak | Dec 26, 2013 | 4,039 posts since 2010

Countries do not simply go out of business when in default. They have a number of options and often just restructure their debt Instead of not paying at all. This is usually accomplished through extending the debt's due date or devaluing their currency to make it more affordable. The risk involved in a country default and the effect on a local HSBC bank would be the devaluation of the local currency holdings of the bank.

drftr | Dec 26, 2013 | 5 posts since 2013

Thanks for your response Shorebreak. Do I interpret it correctly if I say that even if a country defaults there is a fair chance that there's no effect for my CDs?

Shorebreak | Dec 26, 2013 | 4,039 posts since 2010

In the event a country opts to devalue their currency to counter a default condition, the purchasing power of the funds of the local currency in a matured CD would probably be diminished.

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