Bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of failure or bankruptcy. A bailout differs from the term bail-in under which the bondholders or depositors of global systemically important financial institutions are forced to participate in the recapitalization process, but taxpayers are not. Some governments also have the power to participate in the insolvency process.
Thus, It is the act of a business, an individual, or a government providing money and resources to a failing company. These actions help to prevent the consequences of that business’s potential downfall which may include bankruptcy and default on its financial obligations. Businesses and governments may receive a bailout which may take the form of a loan, the purchasing of bonds, stocks or cash infusions, and may require the recused party to reimburse the support, depending upon the terms.
Bailouts traditionally occurred in industries or businesses which are no longer viable or that have sustained huge losses. However, even seemingly stable sectors such as banks are susceptible to failure, as seen during the 2008 financial sector bailout.
Advantages of Bailout
- It ensure continued survival of the entity being rescued under difficult economic circumstances.
- Complete collapse of the financial system can be avoided, when industries too big to fail start to crumble.
- The government in these cases steps in to avoid the insolvency of institutions that are needed for the smooth functioning of the overall markets.
- Anticipated bailouts encourage a moral hazard by allowing not only promoters but also other stakeholders customers, lenders, suppliers to take higher-than-recommended risks in financial transactions. This happens because they start counting on a bailout when things go wrong.