Debt crisis

economic-dictionary

A debt crisis is an economic phenomenon that countries or supranational organizations go through. Due to financing problems, normally related to difficulties in the payment of their commitments or the management of interest rates.

Generally, this type of financial crisis for countries arises from accumulating a large volume of debt. Always, after the excessive issuance of public debt securities. All this with the main purpose of obtaining the most short-term financing, as well as being able to face imminent payments or budgetary commitments. That is, when the State does not address the payment of its commitments by repaying the loans obtained or their respective interests.

The study of the size and danger of this type of economic crisis focuses on the relationship that exists between the public debt that a particular country has and the volume of gross domestic product (GDP) in which it moves annually. This helps economists to know how much the State will have to produce in an exercise to be able to face its external debts. Another existing modality is to resort to the relationship between GDP and the public deficit.

Debt crises are also known in the economic and financial sphere as public debt or sovereign debt crisis. Historically they have been experienced in periods of war or together with other types of crisis. A very clear example is the European debt crisis.

Main causes of a debt crisis

These are the main causes that can cause a debt crisis in a State:

  • Problems in the payment of the commitments that the State has with respect to external agents, putting its future payment in doubt.
  • Complication when finding new lenders or creditors in the financial market.
  • Increases in interest rates related to the debt assumed by the countries.

Incurring in a sovereign debt crisis on many occasions leads to bankruptcies, serious problems meeting internal payments, or the inability to grow internal savings, which ultimately ends up hurting not only unpaid lenders but also borrowers. citizens of the country itself, in terms of public spending (health, security, social services, etc.).

State measures in the face of debt crisis

As solution or settlement mechanisms in these cases, the most common is that the State commits itself with its creditors to meet new conditions in the loans, so that they can reduce the nominal value of public debt securities, lower the rate of interest or change due dates.

A more extreme case than the previous one is the negotiation of debt reliefs or suspensions, a concept frequently present in the economic situation in recent years with what happened in countries like Greece, for example.

Alternatively, it is also frequent that states with the possibility to do so implement expansive monetary policies, so that through the issuance of money and its injection into the country's economy.

The common thing is to speak of a debt crisis in macroeconomic environments. Although, by definition, also in the microeconomic sphere. This occurs when individuals or companies are faced with volumes of debt greater than they are capable of responding.

Tags:  opinion derivatives banks 

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