Government debt
Encyclopedia
Government debt is money (or credit
) owed by a central government
. In the US, "government debt" may also refer to the debt of a municipal or local government
. By contrast, annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.
Sovereign debt, specifically, is debt owed by a government that is issued in bonds with a foreign currency. In the 2010 Greek debt crisis, for example, the debt is held by Greece in Euros, and one proposed solution is for Greece to go back to issuing its own Drachma.
As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt
(owed to lenders within the country) and external debt
(owed to foreign lenders). Governments usually borrow by issuing securities
, government bond
s and bills. Less creditworthy countries sometimes borrow directly from supranational institutions.
A broader definition of government debt considers all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid.
Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, long term is for more than ten years. Medium term debt falls between these two boundaries.
issued by a national government. Such bonds are often denominated in the country's domestic currency
. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
Government bonds are sometimes regarded as risk-free bond
s, because national governments can raise taxes or reduce spending up to a certain point; in many cases they "print more money" to redeem the bond at maturity. (Some governments are not currently entitled to print money directly, but only through a Central bank at interest.)
Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.
, or the euro
is that many investors wish to invest in such bonds. Countries such as the United States
, Germany
, Italy
and France
have only issued in their domestic currency (or in the Euro
in the case of Euro members).
Relatively few investors are willing to invest in currencies that do not have a long track record of stability. A disadvantage for a government issuing bonds in a foreign currency is that there is a risk that it will not be able to obtain the foreign currency to pay the interest or redeem the bonds. In 1997 and 1998, during the Asian financial crisis, this became a serious problem when many countries were unable to keep their exchange rate fixed
due to speculative
attacks.
." This is because, up to a point, the debt and interest can be repaid by raising tax receipts (either by economic growth
or raising tax rates), a reduction in spending, or failing that by simply printing more money. It is widely considered that this would increase inflation and reduce the value
of the invested capital
. This has happened many times throughout history, and a typical example of this is provided by Weimar Germany
of the 1920s which suffered from hyperinflation
due to its government's inability to pay the national debt deriving from the costs of World War I.
In practice, the market interest rate tends to be different for debts of different countries. An example is in borrowing by different European Union countries denominated in euros. Even though the currency is the same in each case, the yield required by the market is higher for some countries' debt than for others. This reflects the views of the market on the relative solvency of the various countries and the likelihood that the debt will be repaid.
A politically unstable state is anything but risk-free as it may—being sovereign—cease its payments. Examples of this phenomenon include Spain
in the 16th and 17th centuries, which nullified its government debt seven times during a century, and revolutionary Russia
of 1917 which refused to accept the responsibility for Imperial Russia's foreign debt. Another political risk is caused by external threats. It is mostly uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered as rebels. For example, all borrowings by the Confederate States of America
were left unpaid after the American Civil War
. On the other hand, in the modern era, the transition from dictatorship and illegitimate governments to democracy does not automatically free the country of the debt contracted by the former government. Today's highly developed global credit markets would be less likely to lend to a country that negated its previous debt, or might require punishing levels of interest rates that would be unacceptable to the borrower.
U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency. In addition, a risk-free status implicitly assumes the stability of the US government and its ability to continue repayments during any financial crisis.
Lending to a national government in a currency other than its own does not give the same confidence in the ability to repay, but this may be offset by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation; and this increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Euro
zone, the euro is the local currency, although no single state can trigger inflation by creating more currency.
Lending to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has sufficient power to tax. In this case, the local government could to a certain extent pay its debts by increasing the taxes, or reduce spending, just as a national one could. Further, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.
, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund
can take certain steps to intervene to prevent anticipated defaults. It is sometimes criticized for the measures it advises nations to take, which often involve cutting back on government spending as part of an economic austerity
regime. In triple bottom line
analysis, this can be seen as degrading capital
on which the nation's economy ultimately depends.
Those considerations do not apply to private debts, by contrast: credit risk
(or the consumer credit rating
) determines the interest rate
, more or less, and entities go bankrupt if they fail to repay. Governments cannot really go bankrupt (and suddenly stop providing services to citizens), thus a far more complex way of managing defaults is required.
Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City
declined into what would have been a bankrupt status during the 1960s (had it been a private entity), by the early 1970s a "bailout
" was required from New York State and the United States
. In general, such measures amount to merging the smaller entity's debt into that of the larger entity and thereby giving it access to the lower interest rates the larger entity enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem.
generally ascribed to theories of John Maynard Keynes
, sometimes called Keynesian economics
, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which, if boom times follow, can then be paid back from rising tax revenues.
As this theory gained global popularity in the 1930s, many nations took on public debt to finance large infrastructural capital
projects — such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some have argued that the greatly increased military spending of World War II
really ended the Great Depression
. Of course, military expenditures are based upon the same tax (or debt) and spend fundamentals as the rest of the national budget, so this argument does little to undermine Keynesian theory. Indeed, some have suggested that significantly higher national spending necessitated by war essentially confirms the basic Keynesian analysis (see Military Keynesianism
).
Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in the United Kingdom
in 1940. Since the war was being paid for, and being won, Keynes and Harry Dexter White
, Assistant Secretary of the United States Department of the Treasury
, were, according to John Kenneth Galbraith
, the dominating influences on the Bretton Woods
agreements. These agreements set the policies for the Bank for International Settlements
(BIS), International Monetary Fund
(IMF), and World Bank
, the so-called Bretton Woods Institutions, launched in the late 1940s for the last two (the BIS was founded in 1930).
These are the dominant economic entities setting policies regarding public debt. Due to its role in setting policies for trade disputes, the World Trade Organization
also has immense power to affect foreign exchange
relations, as many nations are dependent on specific commodity markets
for the balance of payments
they require to repay debt.
Understanding the structure of public debt and analyzing its risk requires one to:
for poorer countries.
A less extreme and more innovative measure would be to permit civil society
groups in every nation to buy the debt in exchange for minority equity
positions in community organizations. Even in dictatorships, the combination of banks and civil society power could force land reform
and overthrow unaccountable governments, since the people and banks would be aligned against the oppressive government.
Using a debt to GDP ratio
is one of the most accepted measures of assessing a nation's debt. For example, in theory one of the criteria of admission to the European Union
's Euro
currency is that a country's debt should not exceed 60% of that country's GDP.
The debt of the United States
over time is documented online at the Department of the Treasury's website TreasuryDirect.
, including the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and the shocks of the 1998 Russian financial crisis and Argentina's default in 2001.
Not all so-called developing countries
have been affected to the same extent. For example Yugoslavia
had low government debt (perhaps because it was unable to borrow on world markets) until its breakup and the coming of democracy, when the new national governments started to borrow money from the IMF. Croatia has a government debt of $47 billion today while the whole of Yugoslavia (six times as many people as Croatia) in 1980 had debt of $14 billion.
" basis to government employees and contractors).
A problem with these implicit government insurance liabilities is that it is hard to cost them accurately, since the amounts of future payments depend on so many factors. First of all, the social security
claims are not "open" bonds
or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value
".
In the United States, as in most other countries, there is no money earmarked in the government's coffers for future social insurance payments. This insurance system is called PAYGO
(pay-as-you-go
). Alternative social insurance strategies might have included a system that involved save and invest.
Furthermore, population projections predict that when the "baby boomers" start to retire the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments - larger than the 65 percent of GDP
that it is now. The "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and increasing the money supply (government spending = tax revenues + change in government debt held by public + change in monetary base
held by the public). "Government social benefits" paid by the United States government during 2003 totaled $1.3 trillion.
In 2010 the European Commission
required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European (Stability and Growth Pact
) level.
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
) owed by a central government
Central government
A central government also known as a national government, union government and in federal states, the federal government, is the government at the level of the nation-state. The structure of central governments varies from institution to institution...
. In the US, "government debt" may also refer to the debt of a municipal or local government
Local government
Local government refers collectively to administrative authorities over areas that are smaller than a state.The term is used to contrast with offices at nation-state level, which are referred to as the central government, national government, or federal government...
. By contrast, annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.
Sovereign debt, specifically, is debt owed by a government that is issued in bonds with a foreign currency. In the 2010 Greek debt crisis, for example, the debt is held by Greece in Euros, and one proposed solution is for Greece to go back to issuing its own Drachma.
As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt
Internal debt
Internal debt is the part of the total debt in a country that is owed to lenders within the country. Internal debt's complement is external debt....
(owed to lenders within the country) and external debt
External debt
External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
(owed to foreign lenders). Governments usually borrow by issuing securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, government bond
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
s and bills. Less creditworthy countries sometimes borrow directly from supranational institutions.
A broader definition of government debt considers all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid.
Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, long term is for more than ten years. Medium term debt falls between these two boundaries.
Government and sovereign bonds
A government bond is a bondBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
issued by a national government. Such bonds are often denominated in the country's domestic currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
Government bonds are sometimes regarded as risk-free bond
Risk-free bond
A risk-free bond is a theoretical bond that repays interest and principal with absolute certainty. The rate of return would be the risk-free interest rate. In practice, government bonds are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic...
s, because national governments can raise taxes or reduce spending up to a certain point; in many cases they "print more money" to redeem the bond at maturity. (Some governments are not currently entitled to print money directly, but only through a Central bank at interest.)
Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.
| Country | Public Debt (billion USD) | % of GDP | per capita (USD) | Note (2008 estimate) (billion USD) |
|---|---|---|---|---|
 United States |
$ 9,133 | 62% | $ 29,158 | ($ 5,415, 38%) |
 Japan |
$ 8,512 | 198% | $ 67,303 | ($ 7,469, 172%) |
 Germany |
$ 2,446 | 83% | $ 30,024 | ($ 1,931, 66%) |
 Italy |
$ 2,113 | 119% | $ 34,627 | ($ 1,933, 106%) |
 India |
$ 2,107 | 52% | $ 1,772 | ($ 1,863, 56%) |
 Mainland China |
$ 1,907 | 19% | $ 1,427 | ($ 1,247, 16%) |
 Early Modern France |
$ 1,767 | 82% | $ 27,062 | ($ 1,453, 68%) |
| $ 1,654 | 76% | $ 26,375 | ($ 1,158, 52%) | |
 Brazil |
$ 1,281 | 59% | $ 6,299 | ($ 775, 39%) |
 Canada |
$ 1,117 | 84% | $ 32,829 | ($ 831, 64%) |
 Spain |
$ 823 | 60% | $ 17,598 | ($ 571, 41%) |
 Mexico |
$ 577 | 37% | $ 5,071 | ($ 561, 36%) |
 Greece |
$ 454 | 143% | $ 42,216 | ($ 335, 97%) |
 Netherlands |
$ 424 | 63% | $ 25,152 | ($ 392, 58%) |
 Turkey |
$ 411 | 43% | $ 5,218 | ($ 362, 40%) |
 Belgium |
$ 398 | 101% | $ 38,139 | ($ 350, 90%) |
 Egypt |
$ 398 | 80% | $ 4,846 | ($ 385, 87%) |
 Poland |
$ 381 | 53% | $ 9,907 | ($ 303, 45%) |
 South Korea |
$ 331 | 23% | $ 6,793 | ($ 326, 24%) |
 Singapore |
$ 309 | 106% | $ 65,144 | |
 Republic of China |
$ 279 | 34% | $ 12,075 | |
| Public Debt is total of all government borrowings less repayments that are denominated in a country's home currency. * CIA's World Factbook list only percentage of GDP, the debt amount and per capita is calculated with GDP (PPP) and population figures of same report. |
||||
Municipal, provincial, or state bonds
Municipal bonds, "munis" in the United States, are debt securities issued by local governments (municipalities).Denominated in reserve currencies
Governments often borrow money in a currency in which the demand for debt securities is strong. An advantage of issuing bonds in a currency such as the US dollar, the pound sterlingPound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
, or the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
is that many investors wish to invest in such bonds. Countries such as the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
and France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
have only issued in their domestic currency (or in the Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
in the case of Euro members).
Relatively few investors are willing to invest in currencies that do not have a long track record of stability. A disadvantage for a government issuing bonds in a foreign currency is that there is a risk that it will not be able to obtain the foreign currency to pay the interest or redeem the bonds. In 1997 and 1998, during the Asian financial crisis, this became a serious problem when many countries were unable to keep their exchange rate fixed
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
due to speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
attacks.
Risk
Lending to a national government in the country's own sovereign currency is often considered "risk free" and is done at a so-called "risk-free interest rateRisk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
." This is because, up to a point, the debt and interest can be repaid by raising tax receipts (either by economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
or raising tax rates), a reduction in spending, or failing that by simply printing more money. It is widely considered that this would increase inflation and reduce the value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
of the invested capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
. This has happened many times throughout history, and a typical example of this is provided by Weimar Germany
Weimar Republic
The Weimar Republic is the name given by historians to the parliamentary republic established in 1919 in Germany to replace the imperial form of government...
of the 1920s which suffered from hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
due to its government's inability to pay the national debt deriving from the costs of World War I.
In practice, the market interest rate tends to be different for debts of different countries. An example is in borrowing by different European Union countries denominated in euros. Even though the currency is the same in each case, the yield required by the market is higher for some countries' debt than for others. This reflects the views of the market on the relative solvency of the various countries and the likelihood that the debt will be repaid.
A politically unstable state is anything but risk-free as it may—being sovereign—cease its payments. Examples of this phenomenon include Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
in the 16th and 17th centuries, which nullified its government debt seven times during a century, and revolutionary Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
of 1917 which refused to accept the responsibility for Imperial Russia's foreign debt. Another political risk is caused by external threats. It is mostly uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered as rebels. For example, all borrowings by the Confederate States of America
Confederate States of America
The Confederate States of America was a government set up from 1861 to 1865 by 11 Southern slave states of the United States of America that had declared their secession from the U.S...
were left unpaid after the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. On the other hand, in the modern era, the transition from dictatorship and illegitimate governments to democracy does not automatically free the country of the debt contracted by the former government. Today's highly developed global credit markets would be less likely to lend to a country that negated its previous debt, or might require punishing levels of interest rates that would be unacceptable to the borrower.
U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency. In addition, a risk-free status implicitly assumes the stability of the US government and its ability to continue repayments during any financial crisis.
Lending to a national government in a currency other than its own does not give the same confidence in the ability to repay, but this may be offset by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation; and this increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
zone, the euro is the local currency, although no single state can trigger inflation by creating more currency.
Lending to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has sufficient power to tax. In this case, the local government could to a certain extent pay its debts by increasing the taxes, or reduce spending, just as a national one could. Further, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.
Clearing and defaults
Public debt clearing standards are set by the Bank for International SettlementsBank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
can take certain steps to intervene to prevent anticipated defaults. It is sometimes criticized for the measures it advises nations to take, which often involve cutting back on government spending as part of an economic austerity
Austerity
In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to...
regime. In triple bottom line
Triple bottom line
The triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
analysis, this can be seen as degrading capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
on which the nation's economy ultimately depends.
Those considerations do not apply to private debts, by contrast: credit risk
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
(or the consumer credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
) determines the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
, more or less, and entities go bankrupt if they fail to repay. Governments cannot really go bankrupt (and suddenly stop providing services to citizens), thus a far more complex way of managing defaults is required.
Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
declined into what would have been a bankrupt status during the 1960s (had it been a private entity), by the early 1970s a "bailout
Bail out (finance)
In economics, a bailout is an act of loaning or giving capital to an entity that is in danger of failing, in an attempt to save it from bankruptcy, insolvency, or total liquidation and ruin; or to allow a failing entity to fail gracefully without spreading contagion.-Overview:A bailout could be...
" was required from New York State and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. In general, such measures amount to merging the smaller entity's debt into that of the larger entity and thereby giving it access to the lower interest rates the larger entity enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem.
Structure
In the dominant economic policyEconomic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
generally ascribed to theories of John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
, sometimes called Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which, if boom times follow, can then be paid back from rising tax revenues.
As this theory gained global popularity in the 1930s, many nations took on public debt to finance large infrastructural capital
Infrastructural capital
Public capital is the aggregate body of government-owned assets that are used as the means for private productivity. Such assets span a wide range including: large components such as highways, airports, roads, transit systems, and railways; local, municipal components such as public education,...
projects — such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some have argued that the greatly increased military spending of World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
really ended the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. Of course, military expenditures are based upon the same tax (or debt) and spend fundamentals as the rest of the national budget, so this argument does little to undermine Keynesian theory. Indeed, some have suggested that significantly higher national spending necessitated by war essentially confirms the basic Keynesian analysis (see Military Keynesianism
Military Keynesianism
Military Keynesianism is the accusation that John Maynard Keynes advocated government economic policy in which the government devotes large amounts of spending to the military in an effort to increase economic growth. In fact, the English economist John Maynard Keynes advocated that government...
).
Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
in 1940. Since the war was being paid for, and being won, Keynes and Harry Dexter White
Harry Dexter White
Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...
, Assistant Secretary of the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, were, according to John Kenneth Galbraith
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...
, the dominating influences on the Bretton Woods
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
agreements. These agreements set the policies for the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
(BIS), International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF), and World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, the so-called Bretton Woods Institutions, launched in the late 1940s for the last two (the BIS was founded in 1930).
These are the dominant economic entities setting policies regarding public debt. Due to its role in setting policies for trade disputes, the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
also has immense power to affect foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
relations, as many nations are dependent on specific commodity markets
Commodity markets
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....
for the balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
they require to repay debt.
Understanding the structure of public debt and analyzing its risk requires one to:
- Assess the expected valueExpected valueIn probability theory, the expected value of a random variable is the weighted average of all possible values that this random variable can take on...
of any public asset being constructed, at least in future tax terms if not in direct revenues. A choice must be made about its status as a public goodPublic goodIn economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
— some public "assets" end up as public badPublic badA public bad, in economics, is the symmetric of a public good. Air pollution is the most obvious example since it is non-excludable and non-rival, and negatively affects welfare....
s, such as nuclear powerNuclear powerNuclear power is the use of sustained nuclear fission to generate heat and electricity. Nuclear power plants provide about 6% of the world's energy and 13–14% of the world's electricity, with the U.S., France, and Japan together accounting for about 50% of nuclear generated electricity...
plants which are extremely expensive to decommission — these costs must also be worked in to asset values. - Determine whether any public debt is being used to finance consumptionConsumption (economics)Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
, which includes all social assistance and all military spending. - Determine whether triple bottom lineTriple bottom lineThe triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
issues are likely to lead to failure or defaults of governments — say due to being overthrown. - Determine whether any of the debt being undertaken may be held to be odious debtOdious debtIn international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
, which might permit it to be disavowed without any effect on a country's credit status. This includes any loans to purchase "assets" such as leaders' palaces, or the people's suppression or extermination. International lawInternational lawPublic international law concerns the structure and conduct of sovereign states; analogous entities, such as the Holy See; and intergovernmental organizations. To a lesser degree, international law also may affect multinational corporations and individuals, an impact increasingly evolving beyond...
does not permit people to be held responsible for such debts — as they did not benefit in any way from the spending and had no control over it. - Determine if any future entitlements are being created by expenditures — financing a public swimming pool for instance may create some right to recreation where it did not previously exist, by precedent and expectations.
Scale
Global debt is of great concern since interest payments can often place great demands on governments and individuals. This has led to calls for universal debt reliefDebt relief
Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and freeing of debt slaves...
for poorer countries.
A less extreme and more innovative measure would be to permit civil society
Civil society
Civil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
groups in every nation to buy the debt in exchange for minority equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
positions in community organizations. Even in dictatorships, the combination of banks and civil society power could force land reform
Land reform
[Image:Jakarta farmers protest23.jpg|300px|thumb|right|Farmers protesting for Land Reform in Indonesia]Land reform involves the changing of laws, regulations or customs regarding land ownership. Land reform may consist of a government-initiated or government-backed property redistribution,...
and overthrow unaccountable governments, since the people and banks would be aligned against the oppressive government.
Using a debt to GDP ratio
Debt to GDP ratio
In economics, the debt-to-GDP ratio is one of the indicators of the health of an economy.It is the amount of national debt of a country as a percentage of its Gross Domestic Product ....
is one of the most accepted measures of assessing a nation's debt. For example, in theory one of the criteria of admission to the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
's Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
currency is that a country's debt should not exceed 60% of that country's GDP.
The debt of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
over time is documented online at the Department of the Treasury's website TreasuryDirect.
Problems
Sovereign debt problems have been a major public policy issue since World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, including the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and the shocks of the 1998 Russian financial crisis and Argentina's default in 2001.
Not all so-called developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
have been affected to the same extent. For example Yugoslavia
Yugoslavia
Yugoslavia refers to three political entities that existed successively on the western part of the Balkans during most of the 20th century....
had low government debt (perhaps because it was unable to borrow on world markets) until its breakup and the coming of democracy, when the new national governments started to borrow money from the IMF. Croatia has a government debt of $47 billion today while the whole of Yugoslavia (six times as many people as Croatia) in 1980 had debt of $14 billion.
Implicit debt
Government "implicit" debt is the promise by a government of future payments from the state. Usually this refers to long term promises of social payments such as pensions and health expenditure; not promises of other expenditure such as education or defense (which are largely paid on a "quid pro quoQuid pro quo
Quid pro quo most often means a more-or-less equal exchange or substitution of goods or services. English speakers often use the term to mean "a favour for a favour" and the phrases with almost identical meaning include: "give and take", "tit for tat", "this for that", and "you scratch my back,...
" basis to government employees and contractors).
A problem with these implicit government insurance liabilities is that it is hard to cost them accurately, since the amounts of future payments depend on so many factors. First of all, the social security
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
claims are not "open" bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value
Net present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
".
In the United States, as in most other countries, there is no money earmarked in the government's coffers for future social insurance payments. This insurance system is called PAYGO
PAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
(pay-as-you-go
Pay-as-you-go tax
Pay as you go is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business, or investment for the current income year...
). Alternative social insurance strategies might have included a system that involved save and invest.
Furthermore, population projections predict that when the "baby boomers" start to retire the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments - larger than the 65 percent of GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
that it is now. The "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and increasing the money supply (government spending = tax revenues + change in government debt held by public + change in monetary base
Monetary base
In economics, the monetary base is a term relating to the money supply , the amount of money in the economy...
held by the public). "Government social benefits" paid by the United States government during 2003 totaled $1.3 trillion.
In 2010 the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European (Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
) level.
See also
- 2010 European sovereign debt crisis2010 European sovereign debt crisisFrom late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter.....
- Bond (finance)Bond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
- Brady BondsBrady BondsBrady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the 1980s, named after U.S. Treasury Secretary Nicholas Brady.-History:...
- Credit default swapCredit default swapA credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
- Developing countries' debtDeveloping countries' debtThe debt of developing countries is external debt incurred by governments of developing countries, generally in quantities beyond the governments' political ability to repay...
- External debtExternal debtExternal debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
- Financial repressionFinancial repressionFinancial repression is a term used to describe several measures which governments employ to channel funds to themselves which in a deregulated market would go elsewhere. Financial repression can be particularly effective at liquidating debt....
- Fiscal policyFiscal policyIn economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
- Generational accountingGenerational accountingGenerational accounting is a relatively new method of national accounting for measuring redistribution of lifetime tax burdens across generations from social insurance, including social security and social health insurance...
- Government budget deficit
- Government investment
- Government spendingGovernment spendingGovernment spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...
- Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- Investment bond
- Public financePublic financePublic finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
- Sovereign bond
- SpeculationSpeculationIn finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
- TaxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
- Taxpayers unionTaxpayer groupsTaxpayer groups, also known as taxpayers union, are formal nonprofit or informal advocacy groups that promote lower taxation, reductions in government spending, and limits to government debt. Many United States cities and countries have taxpayer groups...
- United States public debtUnited States public debtThe United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies...
- Warrant (of Payment)
External links
- The IMF Public Financial Management Blog
- OECD government debt statistics
- Canadian Taxpayers Federation debt clock
- French public debt clock
- UK national debt clock
- Germany's taxpayers union and debt clock (at the top of the page)
- Japan's national debt
- Riksgäldskontoret – Swedish national debt office
- United States Treasury, Bureau of Public Debt — The Debt to the Penny and Who Holds It
- The US National Debt Clock by Ed Hall
- Slaying the Dragon of Debt, Regional Oral History Office, The Bancroft Library, University of California, Berkeley
- National debt: Country comparison
Databases
- Public Debt Database A complete listing of all Public Debt securities issued by the United States Treasury and its predecessors between 1775 and 1976.
- CLYPS dataset on public debt level and composition in Latin America