Debt crisis

A debt crisis is an economic phenomenon that countries or supranational organizations are going through when they experience financing problems, usually related to difficulties in paying their commitments or managing interest rates .

Generally, this type of financial crisis for the countries arises from accumulating a large volume of debt , following the excessive issuance of public debt securities whose main purpose is the most short-term financing and to be able to face imminent payments or budgetary commitments. That is, when the State does not address the payment of its commitments by returning the loans obtained or their respective interests .

The study of the size and danger of this type of economic crisis focuses on the relationship between the public debt that a particular country has and the volume of GDP in which it moves annually . This helps economists know how much the state will have to produce in an exercise in order to face their 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 a public debt or sovereign debt crisis . Historically they have been experienced in war periods or with other types of crises. A very clear example is the European debt crisis .

Main causes of a debt crisis

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

  • Problems in the payment of the commitments that the State has regarding external agents, doubting their future payment.
  • Complication when finding new lenders or creditorsin the financial market.
  • Increases in interest rates related to the debt assumed by countries.

Entering into a sovereign debt crisis often leads to bankruptcies , serious problems in complying with your internal payments or the inability to grow your internal savings, which ultimately ends up harming not only the unpaid lenders but also the citizens of the country itself, in terms of public spending (health, security, social services …).

State measures before debt crisis

As a solution or settlement mechanism 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 decrease the nominal value of the public debt securities, reduce the type of interest or change due dates .

A more extreme case to the previous one is the negotiation of debt removals or suspensions , a concept of frequent presence in the current economic situation of recent years with what happened in countries like Greece , for example.

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

The common thing is to talk about debt crisis in macroeconomic environments, although by definition also in the microeconomic field when individuals or companies face larger volumes of debt than they are able to respond.

by Abdullah Sam
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