Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. You've heard it before: someone runs into credit card or mortgage payment problems and needs to work out a payment plan to avoid going bankrupt.
What does an entire country do when it runs into a similar debt problem? For a number of emerging economies issuing sovereign debt is the only way to raise funds, but things can go sour quickly. How do countries deal with their debt while striving to grow? Most countries — from those developing their economies to the world's richest nations — issue debt in order to finance their growth.
This is similar to how a business will take out a loan to finance a new project, or how a family might take out a loan to buy a home. The big difference is size; sovereign debt loans will likely cover billions of dollars while personal or business loans can at time be fairly small.
Sovereign Debt Sovereign debt is a promise by a government to pay those who lend it money. It is the value of bonds issued by that country's government. The big difference between government debt and sovereign debt is that government debt is issued in the domestic currency, while sovereign debt is issued in a foreign currency.
The loan is guaranteed by the country of issue. Before buying a government's sovereign debt, investors determine the risk of the investment. The debt of some countries, such as the United States, is generally considered risk free, while the debt of emerging or developing countries carries greater risk. Investors have to consider the government's stability, how the government plans to repay the debt, and the possibility of the country going into default.
In some ways, this risk analysis is similar to that performed with corporate debt, though with sovereign debt investors can sometimes be left significantly more exposed.
If higher taxes leave people with less money to spend, it can be bad for economic growth and jobs. A bond is a promise to make payments to whoever holds it on certain dates. There is a large payment on the final date - in effect, the repayment. Interest is also paid to whoever owns the bond in the meantime. So it's basically an interest-paying "IOU".
The buyers of these bonds, or "gilts", are mainly financial institutions, like pension funds, investment funds, banks and insurance companies. Some also end up being bought by the Bank of England as part of its current attempts to boost spending and investment in the economy.
Government bonds appeal to investors as they are seen as essentially safe - with little risk that the money won't be paid. You won't lose your money and you know precisely when and how much the payments will be.
Some government borrowing has to be repaid in a month, but some lending is for as long as 30 years. The minimum repayment period is just one day, while some bonds have been issued for 55 years. There used to be some government debt which never had to be repaid, sometimes known as perpetual bonds. Our research, based on a comprehensive new data set, shows that China has extended many more loans to developing countries than previously known.
China does not report on its international lending, and Chinese loans literally fall through the cracks of traditional data-gathering institutions. Debtor countries themselves often do not collect data on debt owed by state-owned companies, which are the main recipients of Chinese loans.
In addition, China is not a member of the Paris Club an informal group of creditor nations or the OECD, both of which collect data on lending by official creditors. To address this lack of knowledge, we embarked on a multi-year data-gathering effort. We compiled data from hundreds of primary and secondary sources, put together by academic institutions, think tanks, and government agencies including historical information from the Central Intelligence Agency.
Most Chinese loans have helped finance large-scale investments in infrastructure, energy, and mining. We also show that China tends to lend at market terms, meaning at interest rates that are close to those in private capital markets. Other official entities, such as the World Bank, typically lend at concessional, below-market interest rates, and longer maturities. In addition, many Chinese loans are backed by collateral, meaning that debt repayments are secured by revenues, such as those coming from commodity exports.
In the s and s, when it lent money to other Communist states, China accounted for a small share of world GDP, so the lending had little or no impact on the pattern of global capital flows. Today, Chinese lending is substantial across the globe. The last comparable surge in state-driven capital outflows was the U. This gives the bank the money and security to basically borrow as cheaply as possible from international credit markets.
As the World Bank can borrow very cheaply, it means it can lend out loans to developing countries at a very low interest. So in short, it's a way for developing countries to access cheap loans, which they would never be able to do in the normal credit markets, as they would be seen as too risky borrowers. These loans are used to fund important development projects and emergency relief. However, there are many critics of the World Bank. Many of the infrastructure projects that the World Bank funds are criticised for actually harming the people they are claiming to help.
One of the most controversial areas of investment is dam construction, as these huge infrastructure projects often cause social and environmental damage and displace local and indigenous communities who have no power or say over how the projects are managed.
The World Bank has also been criticised for burdening poor countries with unproductive debt. The World Bank is also highly undemocratic, as it is mainly governed by industrialised, rich countries. Decisions are often made by the richest countries without consulting the developing countries who are supposed to be the beneficiaries of the Bank. This site uses JavaScript.
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