Default Trap

A default trap occurs when a borrower, often a country or corporation, enters a cycle of accumulating debt that they cannot repay, leading to an increased risk of default. This situation arises when a borrower continues to borrow more money to cover existing obligations, but the additional debt increases their financial burden, making it harder to repay. As debts increase, lenders may demand higher interest rates, worsening the borrower’s situation and trapping them in a cycle of borrowing and default risk.

Example

Argentina has experienced several default traps, where high levels of public debt led to repeated financial crises.