The Scale Of Debt Crisis

Introduction

Debt crisis is situation in which an individual, company, or country owes more to others than it can repay or pay interest

A debt crisis deals with countries and their ability to repay borrowed funds. Therefore, it deals with national economies, international loans and national budgeting. The definitions of "debt crisis" have varied over time, with major institutions such as Standard and Poor's or the International Monetary Fund (IMF) offering their own views on the matter. The most basic definition that all agree on is that a debt crisis is when a national government cannot pay the debt it owes and seeks, as a result, some form of assistance or requiring rescheduling of loans or bailout packages from other countries or multilateral institutions such as IMF.

Discussion

When a country faces the prospects of being unable to make good on its outstanding debts, this is a debt crisis. The effects of a debt crisis can be severe. It can downgrade the country's credit rating, making it harder to borrow money, and it may force the country may to slash services. A number of factors can cause debt.

History

Many countries have suffered debt crisis throughout history. In the early 1980s, a number of Latin American countries, which took on a heavy debt burden in the preceding decade to finance infrastructure development, found they were unable to repay their debt owed to Western nations. More recently, in 2010, Greece faced a danger of default after officials discovered the debts were much larger than realized, precipitating a bailout by the European Union.

Features

The definition of a debt crisis is when a country has significant enough debt that it is in imminent danger of defaulting, if it has not done so already. For a debt crisis to happen, the country must have taken out a significant amount of loans. In many cases, this may have been in good faith, with the belief that the country could pay it back.

Causes

A debt crisis can result from many causes. In the case of Latin America, the increase in the size of the economy was not enough to match the interest payment on the loans. When interest rates rose, many countries were unable to service their debt successfully. In the case of Greece, the government expanded social services to a point where it was no longer able to pay for them.

Effects

As with debt taken on by individuals, government debt can often spiral out of control. As the government attempts to pay the interest on its loans, the country becomes unable to provide the kinds of services required to increase revenues. This causes the debt to go unpaid, meaning interest on the debt increases, pushing the country even deeper into debt.

Conclusion

Debt crises for individuals are very much like debt crises for nations. The debtor owes too much money to too many people. Hit with penalties and interest payments, the debtor will often spend all her financial resources merely servicing the interest on the debt and never attacking the principal. For both individuals and debt-plagued nations, the solutions to solve this crisis are similar.

Cut Back Spending

One of the simplest -- if often painful -- solutions to solving a debt crisis is to cut back spending. By spending less, the debtor has more money to pay back his creditors. By freeing up this cash, the debtor is not just treading water by paying interest, but gradually reducing the total size of the debt. However, sometimes cuts are so painful that the treatment can be worse than the medicine.

Restructure Debts

Another solution is to restructure debts. Sometimes, a debtor will be able to pay what he owes if only given more time to do so. If the debtor is allowed to change the repayment structure -- if, for example, he is allowed to reduce the payment size and interest rate and pay back the money over a longer period of time -- then both the creditor and the debtor may be placated.

Debt Settlement

Sometimes, a debtor will attempt to settle his debts for less than he owes. For both individuals and nations, this has the obvious benefit of cutting down the debt load. Many times, creditors are willing to settle for what the debtor can pay, on the principle that partial payment beats no payment at all. However, for both kinds of debtors, paying only part of a debtor will lower the credit rating and lead to higher interest payments on new loans.

Bankruptcy

A debtor can also, as a last resort, declare bankruptcy. For an individual, this involves declaring personal bankruptcy and allowing a judge control over many of his personal finances. For a country, this can take many forms, including simple declaring that it will not make good on the money that it owes, come what may. In both cases, the debtor's credit rating will be badly damaged, at least temporarily.