If foreign investors believe that the Lebanese government will default on their debt, what might happen?

Question

Quizplus · Accepted Answer

If foreign investors believe that the Lebanese government will default on their debt, they will demand a higher return to compensate for the increased risk. This will lead to an increase in Lebanese interest rates, making it more expensive for the government to borrow money. Additionally, investors may withdraw their capital from Lebanon, leading to a net capital outflow. This will put pressure on the Lebanese economy and the government's ability to pay its debts. Therefore, an increase in both Lebanese interest rates and net capital outflow is the most likely outcome if foreign investors believe that the Lebanese government will default on their debt.

If Foreign Investors Believe That the Lebanese Government Will Default