Sovereign default
A state's failure to meet payment obligations on its debt, which cannot be resolved through bankruptcy and triggers in a chain the covers for non-payment, inconvertibility and contract frustration.
A sovereign default occurs when a state fails to pay interest or principal on its debt when due, or imposes on its creditors a restructuring that reduces their rights. It differs radically from a corporate default: there is no bankruptcy procedure for a state, its assets are largely protected by immunity from execution, and resolution runs through a political negotiation among the debtor, its public creditors, its private creditors and the international financial institutions. For insurance, a sovereign default is an accumulation event. It directly hits state-guaranteed loans and claims on state-owned companies, covered by non-payment and non-honoring covers. It is almost always accompanied by exchange controls that stop solvent private debtors from paying in foreign currency, triggering inconvertibility covers. And it can interrupt public contracts, which falls under contract frustration. The credit and political risk underwriter therefore reasons by country rather than by counterparty, capping its commitments on each state.
On April 12, 2022, Sri Lanka announced it was suspending service on its external debt, the first default in its history, after its foreign exchange reserves ran out. The country's importers, even solvent ones, could no longer obtain foreign currency to pay their foreign suppliers, and inconvertibility and non-payment covers were called on simultaneously.
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