If I recall from several media discussions about this:
Countries don’t go “bankrupt” like people or countries, as in “I can’t pay my debts, please take all that you can from my assets and don’t bother me again…” They simply stop paying their debts - because they can’t or won’t.
First thing - obviously - any immediate transactions from now on will be on a cash-on-delivery basis, unless the supplier is pretty stupid. The Upper Slobivia air force buys some parts, hey write a cheque; where is the cheque drawn, and who guarantees it will be cashed? SOme serious negotiations will happen, probably involving multi-way barter to produce enough cash-flow to meet operating requirements. Not much different from a company in dire straits, the bank or country supplying the cash will want something physical to back up the transactions. Assets like gold reserves will quickly end up in some third country’s vaults as “assets in trust to guarantee eventual repayment of the loan”. If something can be sold, it probably will.
Bond-holders, and other countries who hold such assets or guaranteed debts before crash, will all line up for renegotiated payments. Like a company trying to prevent failure, the negotiations will basically boil down to - “Here’s what we can afford to pay, and for how long. Settle for 75 cents on the dollar.” A country has the advantage that it can’t really be sold off or dismantled (usually) soit’s more of a “take it or leave it” proposition. The only advantage the debtors have is that the country will find it difficult to do business if they spend too long or demand too much leniency.
The local currency will not be worth much, so odds are the country will have to take charge of finding foreign currency (i.e. US dollars, Euros) to perform transactions.
The internal economy will take a dump. Most larger economies rely on easy currency exchange and relatively stable exchange rates. If the local Best Buy of Upper Slobivia Ltd. can’t pay for new stock from China, and can’t price their TV’s or computers in local currency low enough that people can afford them, then they close up and all their local geeks are unemployed. Multiply this by every business that touches on foreign goods, and your whole economy is toast.
(This is what happened to the car industry. The banks were not sure they had money to lend, and were too scared to lend anyone any money - so nobody bought cars, since a $20K to $60K purchase usually needs credit. When sales basically tanked, so did the auto industry. Notice how they recovered pretty well since people can and will borrow again.)
The people that have money won’t spend it (except on substantial things with real tradeable value, like gold). If the country does not impose currency controls, people will move what they have into foreign currency, thus making the bad exchange rate situation worse. Exchange controls - even worse. How would Best Buy run if they cannot pay their Taiwanese suppliers?
Eventually, down the road, the country’s economy slowly reboots and gets going again. The situation that caused the problem - poor mortgage investments, invasion, or really bad political management - likely has corrected itself. People begin to trust… Does the market really have a poor memory? No, it’s more likely that the people willing to take a risk and lend to a less reliable partner stand to reap huge rewards if the gamble pays off. Once one starts reaping, everyone else joins in.
Fortunately for the world, most collapsing economies are pretty third world; when complex economies - Argentina, for example - bite the big one, it’s pretty spectacular.
Countries like Greece or Portugal are a special case; since they don’t print their own currencies, they probably are more like US states or provinces economically. You can’t sell bonds? You stop paying people, you stop paying debts. The huge debts got you into this mess; all the debt(bond) holders stop getting their payments. That’s probably all the major financial institutions, pension funds, and anyone else who buys bonds. Pensions stop being paid. Banks start to fail. Greece drags down all the banks in Europe (by the time it reaches this point, everyone has a ton of Greek bonds). The whole region’s economy grinds to a halt… The euro crashes and now nobody in Europe can afford that big screen TV from Best Buy, businesses start to go under. You can see why the rest of europe wants the situation fixed ASAP.
the solution is the same; the rest of the countries chip in a bit, Greece goes on austerity and bond holders agree to less money paid. Everone suffers except the people who got to spend that borrowed money before the crisis.