Where does a country gets money to fund its deficit?
In: Economics
Countries sell bonds that guarantee a return in value after a specific period (typically 10 to 30 years). The bonds cannot be cashed early. The interest rate they pay is typically very low (assuming you’re in good economic standing), but it is pretty much guaranteed, and is thus, a safe investment for at least some portion of a large portfolios funds.
Quite often, investors will buy back more bonds as their bonds mature. This more or less would be an interest payment on the debt from the countries point of view.
Governments borrow money by printing bonds, which they sell to other countries, investors, corporations, etc.
Government paper is considered to be a very stable investment because you know the country will pay the debt back on time. Unfortunately it means that for a lot of countries, “paying interest on debt” makes up a significant portion of their national budget.
Usually through issuing bonds or other debt instruments. Occasionally from direct borrowing.
Countries can sell bonds to be bought by investors. A bond is a promise by the government to repay the cost of the bond, plus interest, at a later date (10, 20, or 30 years).
Countries issue bonds, bought by investors who want to earn interest. Some are bought by individuals, but most go to institutional investors like pension funds, university endowments, bond mutual funds, insurance companies.
Bonds. Most governments will auctions bonds, which are usually contracts that say “buy this contract for me now, and I will pay you X amount in/over Y time”. For example, the US Treasury may issue a bond that pays $100 in 30 days and puts it on auction. Investors, which can be from all over the world including individuals, retirement funds, investment banks, other governments, etc, buy the bond on the auctions. Usually the bond sales for less than its nominal value, so a $100 US Treasury bond may sell for $99 at auction. So now, the government has $99 cash to spend and must pay out $100, usually through a combination of taxes and new bonds.
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