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
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.
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