Moratorium Meaning and Real-World Cases

Key takeaways

• A moratorium, from the Latin “morari” (to delay), is when a country postpones payment on external debt: it will pay eventually, but not now.
• It damages the country’s credit rating and can trigger a sovereign bond crash, even though it avoids outright default.
• Examples include Germany after World War I, Russia in 1998, Dubai World in November 2009, and North Korea’s use of the term for test deferrals.

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

FAQ

What does moratorium mean?

A country unilaterally postponing repayment of external debt, essentially saying “we’ll pay eventually, but please wait.”

How is a moratorium different from a default?

A moratorium delays payment while signalling intent to repay, whereas a default halts payment outright, though a moratorium still publicly admits a lack of capital.

What are famous moratorium cases?

Germany after World War I, Russia in 1998 (including USD 1.9 billion of Korean bonds deferred), and Dubai World on 26 November 2009.

Related: Sovereign default declaration