Category Archives: Economy

How Do Nations Borrow Money?

Author: Roy Barker

Just like individuals, nations borrow money and just like individuals, they also have to repay their debt along with interest! And why some nations can’t borrow money? For the same reasons as individuals their expenses are greater than their income. To meet the gap, the country can print currency, raise debt and cut expenditure. Often a country combines the three to tackle its financial hurdles.

There are primarily three ways that a nation can borrow money; 1. is by issuing bonds internally to its own citizens, taking a loan from international bodies like the World Bank or the Asian Development Bank etc. and

3.third is by taking loans from other countries.

Most Governments issue Treasury Bonds and other Debt Instruments which essentially means that governments are borrowing on behalf of the country from their citizens. While most of these bonds are issued to cover the expenses of the government in some cases they are issued with some specific purpose like building infrastructure etc. Normally the bonds issued by governments are considered to be the safest way to invest money and so the interest rate given by them is also the lowest. These bonds are bought and sold in the open market and their yields also keep varying.

Then the second source of borrowing for countries is from institutions like the International Monetary Fund or the Asian Development Bank. Here the countries have to specify what the purpose of the funds are going to be and the inspectors from these institutions then visit the country to appraise the project. For example if a particular country wants to borrow money for building a Dam they will approach the international fund. The fund will then send their inspectors to appraise the project, see the viability and the benefits that are going to accrue to the people as a result of the project. They then determine the amount of the loan, tenure and the interest rate. Normally such loans are subsidized as they are normally for good causes.

These types of loans are not given out in lump sums and money is released at different stages of the project and the repayment also normally starts at the end of an alotted time period – say 5 years or so. This provision is kept because the country is seeking the loan precisely because they do not have funds at hand and the project being undertaken is for the benefit of the people. However, this does not mean that interest does not accrue on that amount for that time period. Interest keeps on accruing which has to be paid later.

The third way in which nations borrow money is by borrowing it from other nations. Normally this is also done with some specific purpose in mind and is quite subsidized which means that the interest rates are lower than normal. Nations do this to develop strategic ties with other nations generally to gain some form of economic or military advantage. For instance the US may decide to lend to Pakistan to fight terrorism or India may lend to Bangladesh to tackle floods because it’s a neighbour. More than financial aid, when nations lend to each other it’s a signal of goodwill and political diplomacy. In political diplomacy there is always give and take and unlike the case of individuals where if one borrows money it is expected to be repaid, here the beneficiary country can repay in other ways as well. While all this is never clearly stated the cases of many debts being written off after a period of time without relationships getting strained is enough evidence to show that the lending country did not really expect to get it back. Other favours can be given in international forums like the WTO for economic reasons or for military reasons by providing a country’s airspace and land for having a military base.

These are the three main ways in which nations borrow and lend money to each other or from their own citizens or international agencies. While in some cases they have to borrow to maintain their expenditures at other times, it is to take care of some special needs like an emergency or some other project. You will notice that most of the above behaviour is quite similar to individuals and if you think about it, you will be able to find similarities even in your own life. Taken in context, it may help you become a little more creative in you personal dealings.

About the Author:
Author: Roy Barker. There is more related to loans, finance or small business borrowings at small business loans or small business loans.

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Global Financial Crisis – What Is That?

Lehman_BrothersYou hear the words, “Global Financial Crisis” everywhere these days, in newspapers, television and all over the internet. We all know its bad and we all know its about money and for the majority of us we don’t really need to know ever little detail of the current economic problems, but what exactly is this GFC and how does it affect me, an everyday regular Joe? (from an Australian point of view).

What is it?

Basically the current economic problems the world face all started in September 2008 when a number of financial firms (loans, capital, etc) based out of the United States basically went bust or merged which then resulted in the failure of the business.

In the lead-up to this, many business journals commented about the financial stability of many investment banks, insurance firms and “loaners” (mortgagers) both in the US and Europe basically about what they were doing wrong which led to the sub-prime mortgage crisis felt largely in the US.

This the resulted in a global credit problem. Lenders stopped lending and everyone kind of froze in shock, dragging the rest of the economy with it.

How does it affect me?

Well over the last few months as we’ve seen fuel prices went sky high, then fell to their lowest point in years.

makingcarsIn early 2009 it will be easier to buy cars but up to a point. Anything imported  2009+ will likely be more expensive as most major currencies rally and loose like crazy. This means you may still get a good buy on 2008< plated models and you may have seen some car companies advertise this fact already so if you’re in the market for a new car get in quick.

Electronics have been cheap in Australia the past 6 months or so mainly because our dollar was so high 6 months ago compared to the US dollar so importing these products cost us less money, but same with cars in Australia…this won’t last forever. Many economists believe early Feb 2009 will start to see these products to rise sharply.

Basically, things at this point can only seem to get worse before they get better and we can see evidence of the Australian government trying to allow for this to bolster the economy. You may remember mid December the government gave a ~$1000 bonus to many families to encourage more spending and the fall of petrol prices is certainly helping this to happen also.

What will happen when/if things get worse?

Who knows? Not me anyway. I’m not a business analyst, economist or anything else. I’m just an interested guy and many others don’t really know either. We’ve never really experienced anything like this on such a scale for quite some time but globally a more conservative view on most.

Personally I can’t speak for the rest of the world but in Australia at least, unemployment is rising and as a consequence of that its getting harder and harder to find a job, and many people in jobs are having a hard enough time trying to keep it! I’ve had to take a reduced workload at work for the business to save money and stay afloat during this tough time, but its better than totally loosing my job I guess.

What do you think about the current global financial crisis? How has it affected you?