Now in theory I should already know this, since I am a teacher for politics, but I have never been really able to wrap my head around it.
I understand that high debts of a state are not that much of a problem as long as it is not too high in comparison to the gross state product.
I still struggle to understand how it has come to this situation. Pretty much every state has to pay massive amounts just to pay the interests on their debts.
Now if only a few states had this problem, I could understand it. But it’s literally every state. I of course understand that sometimes in a time of crisis there is need for deficit spending. However I fail to understand how this is really sustainable. Isn’t there a possibility to just make a cut and start anew without debts somehow? I assume we would end up in the same situation as before a few decades later, but why is this system only working with massive debts? This seems like a giant flaw to me. From what I gathered this is basically WAD, but how?
Thanks in advance.
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Do not forget the perspective of the creditors. For them a state is (often) a very reliable entity. They do not disappear easily and most countries would like to keep their credit ratings on an attractive level (barring massive economic shocks, wars or fantastical political programmes), or they’ll face punishing market rates. States can ultimately print legal tender and usually have a lender of last resort in the form of a central bank. Companies and other investment opportunities usually don’t have these advantages, or at least not on that scale. So even a highly indebted country can remain an attractive debtor.
>Pretty much every state has to pay massive amounts just to pay the interests on their debts.
Only the percentages matter. A small percentage of a massive amount of debt is just another long number. It also matters to whom this debt is owed. If it is owed to the citizens of the country or an important trade partner they will also be invested in the future economic well-being of the state in different ways.
>Isn’t there a possibility to just make a cut and start anew without debts somehow?
Yes, that would be a sovereign default. That can have some nasty consequences though, especially for the financial reputation of the country.
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