A bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat. It can take the form of loans, cash, bonds, or stock purchases. It may or may not require reimbursement and is often accompanied by greater government oversee and regulations.
The reason for a bail-out is to support an industry that may be affecting millions of people internationally and could be on the verge of bankruptcy due to prolonged financial crises. 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.
A bailout differs from the term bail-in (coined in 2010) under which the bondholders or depositors of global systemically important financial institutions (G-SIFIs) are forced to participate in the recapitalization process, but taxpayers are not. Some governments also have the power to participate in the insolvency process: for instance, the U.S. government intervened in the General Motors bailout of 2009–2013. A bailout can, but does not necessarily, avoid an insolvency process. The term bailout is maritime in origin and describes the act of removing water from a sinking vessel using a bucket.
Importance of Bailout
- It is the injection of money into a business or organization that would otherwise face imminent collapse.
- Bailouts can be in the form of loans, bonds, stocks, or cash.
- Some loans require reimbursement either with or without interest payments.
- Bailouts typically go to companies or industries which directly impact the health of the overall economy, rather than just one particular sector or industry.