Does country’s debts affect anything in that country? Why some have trillion dollars debts that look like it’ll never going to go away yet they can chill about this fact?
In: Economics
Because for the debt to become troubling, you’ve got to have a creditor who’ll be persistent in requesting the money from you.
Now, trillion dollar external debts are about countries like USA, France, Germany, Japan etc.
Who’ll be the creditor who comes at them and says, hey, give me my money back? Pretty much no country can do that.
Those who can, have large external debts as well. If they ask for their money as creditors, they’ll be the next to be asked to return debt.
Debt is bad when you are a private investor who lost all your student debt on options gambling. The government will require the money that you owe.
When you are among top 10 world economies, external debt is fine. Until it’s not, but the “until it’s not” part may not set in any time soon.
It does go away. The debt is constantly paid of but new debt is also constantly taken on. So as long as the old debt is being paid of there is no problem because every one gets their money. Countries still get into trouble with taking on to much debt what point that is hard to determine. There are a few metrics that try to predict this like debt to gdp % or debt growth compared to gdp growth. For example it is considered bad if debt growth more than gdp in a year, that still doesnt mean a country cant pay of its debts when this happens. These metrics still dont provide a number where you can say a country will have problem when they reach number x.
If you need money, you can borrow money. People will lend you money, if they think they’ll get it back.
Now the US may have trillions in debt, but nobody thinks they won’t pay back. So they keep lending and things are fine.
Now a different country, perhaps war-torn, perhaps with an erratic dictator, that may or may not decide to pay, or may or may not be assassinated next week by an ursurper that may or may not pick up his predecessors debt may just have a tiny amount of debt, but nobody will lend them money, because they think they won’t get it back.
The simple answer is: it depends. Greece had a severe debt crisis throughout a lot of the 2010’s, and they were in danger of defaulting. Japan has a lot more debt than Greece currently, but is not in danger of defaulting.
This is a really complicated and complex issue, and reasonable people can disagree on what the best policy is. Generally speaking, people don’t look at the overall debt amount a country has, but rather a percentage of their debt to GDP ratio. Which makes sense, how much a country owns isn’t useful information if we don’t know how much they make. If I borrow $5, but I’m unemployed, I’m in high danger of not paying that back. If I borrow $1,000, but I make $500,000 a year, you’re thinking my odds are good I’ll pay it back.
Another crucial part of the puzzle is what currency is the debt in and who owns the debt. Greece almost defaulted because their debt was mostly in the Euro, which is controlled by all the European countries. So Greece doesn’t have much of a say in making changes to it to help themselves out. Japan’s debt is internally owned for the most part. That gives them the luxury of making adjustments to their own currency.
And lastly, public debt isn’t always a bad thing. In fact, it’s a useful thing. You don’t want a government to have no debt. It’s a beneficial thing to have it; public debt is very different from private debt. Governments don’t end. Debt doesn’t need to be paid off the way an individual does.
Countries can rack up huge debts, but they can manage it because of their economy’s size. If the economy grows, it makes paying off that debt easier over time.
The debt has still interest that has to be paid – that interest payments are going to miss from your country’s budget, when it comes to paying for roads, schools, hospitals, etc. Of course you should care!
A lot of good answers above.
Another interesting element that also comes into play is inflation. Debts can get “inflated away” over time.
For example:
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1) let’s say you got an interest free loan in 1950, for 10 million dollars. And nobody was in a hurry to get that money back.
2) You then finally repay the 10 million dollars in 2024.
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Well, the interesting part is that back in 1950, 10 million was equivalent in buying power to 130 million today.
So you got “130 million” worth of buying power back then, and only had to pay back 10 million today!
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Now of course most loans have interest.
But if you had 130 million purchasing power back then, and used it to buy resources and implement infrastructure, and make good investments in a company or nations future, then that likely means:
The 130 million in purchasing power would have generated a boatload (billions!) of money over the years that would easily keep up with the interest payments throughout that time.
And then at the end, it becomes “insignificant” to the debtor to pay back that 10 million dollar debt in the further future. (10 million is peanuts by the time they pay it back.)
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Another example:
Consider how some of the tech giants of today effectively got loans 10 million, or 1 million, or even less in the 1970’s (not sure about the specific amounts), to start their company in a garage.
So then let’s say they never got around to paying it back, and just kept making interest payments.
Fast forward to today, and that outstanding loan on the books would be insignificant for the company to pay.
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So again: while a loan/debt can look scary and huge now, if the country/company uses it wisely, by the time you get around to repaying that loan it’s insignificant. (Hopefully–if all goes relatively well for that nation!)
Yes, it does.
As capital is a limited resource, to increase government debt should have a positive impact on interest rates.
Should the markets become doubtful about a countrys capacity to pay back debt, they
A) will ask for a higher risk premium in order to lend aka higher interest rates. This will hit through the whole debt market for that currency
B) some will avoid the risk, sell their government nonds and convert back into their home currency thus increasing interest rates and lowering currency value.
So it tends to increase interest rates and lower exchange rates of the countrys currency.
Tend as in normal business it‘s in equilibrium more or less. So, it‘s about change.
Debt is not a static thing. You need to pay it back, you pay the interest every year from your budget, and you sometimes need to pay back the debt itself.
Why the debt seems “rising” or keeping at the same value is because you usually take new debt to finance current operations or pay back the old debt.
For the most part unless you spend significant amount of money on “debt maintenance” or you have large debt chunk expiring suddenly, the debt value itself is harmless.
Honestly, to keep it super simply, rich countries tend to be fine because they take out debt in their currency and are too important to the worlds economy, and poor countries tend to have their debt in the wealthy counties’s currency and don’t impact the worlds economy as significantly.
For example, the US’s debt to China is in US dollars so if China demanded we repay our debts, we’d just print more money in US dollars. Additionally, because the US/wealthy countries are integral to the world economy, calling in their debt would likely harm if not cripple not just the world’s economy but also the economy of the country calling in the debt. Also, powerful countries can just say no, I’m not repaying you deal with it, should push come to shove.
However, if a poor/developing countries whose debt is owned by another country, like say the US and their debt is in US dollar, they do not have the ability to just print more money bc 1) they can’t print US dollars, and 2) printing more of their currency would likely destabilize their economy by causing inflation to sky rocket. Additionally, they have no power to say no. And powerful countries don’t care if they crashing the poor country’s economy by calling in their debt because it likely won’t hurt the world economy, just the local/regional.
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