Something that is owed by a person, organization, or country, usually money, goods, or services. Debt usually occurs as a result of borrowing credit. Debt servicing is the payment of interest on a debt. The national debt of a country is the total money owed by the national government to private individuals, banks, and so on; international debt, the money owed by one country to another, began on a large scale with the investment in foreign countries by newly industrialized countries in the late 19th to early 20th centuries. By the end of the 20th century, the two main types of debt in developing countries were multilateral debt (owed to international financial institutions such as the World Bank) and bilateral debt owed to governments, either for aid loans or export credit guarantee loans (made to underwrite exports). International debt first became a global problem as a result of the oil crisis of the 1970s. Debtor countries paid an ever-increasing share of their national output in debt servicing (paying off the interest on a debt, rather than paying off the debt itself).
Debt relief By the 1980s, countries such as Mexico and Brazil had reached a debt-servicing ratio (proportion of export earnings which is required to pay off the debt) of more than 50%, but disagreement over who should bear the cost of debt relief delayed any real reform. Austerity measures imposed by the International Monetary Fund (IMF) in exchange for loans provoked riots and an increase in nationalist sentiment. International debt spiralled as debtor countries took further loans in order to repay existing debts.
In order to provide debt relief for low-income member countries, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative in 1996. Under the scheme, countries eligible for HIPC relief have their debts to multilaterals, and export credit guarantee debts to governments, reduced. Governments associated with the initiative, such as the UK, contribute to a trust fund for reducing debts. Eligibility for HIPC relief is decided by analysis of a country's economy and its plans for using the relief. The initiative was revised in 1999 and supplemented in 2005 by the Multilateral Debt Relief Initiative (MDRI). Debt relief may be reviewed if it is suspected that money released will be used to fund military conflict rather than fighting poverty.
Debt crises A debt crisis may be defined as a situation in which a country or countries owe more to others than they can repay or pay interest on.
As a result of the Bretton Woods Conference in 1944, the World Bank (officially called the International Bank for Reconstruction and Development) was established in 1945 as an agency of the United Nations to finance international development, by providing loans where private capital was not forthcoming. Loans were made largely at prevailing market rates (‘hard loans’) and therefore generally to the industrialized countries, who could afford them.
In 1960 the International Development Association (IDA) was set up as an offshoot of the World Bank to provide interest-free (‘soft’) loans over a long period to finance the economies of industrializing countries and to assist their long-term development.
However, turbulence in the world economy resulted in debtor countries paying an ever-increasing share of their national output in debt servicing. As a result, many loans had to be rescheduled (renegotiated so that repayments were made over a longer term). For the Western industrialized countries, the possibility of a confidence crisis causing panic withdrawals of deposits and consequent collapse of the banking system prompted multilateral organizations and governments to look at ways of offering debt relief to lower-income countries.
Nevertheless, the problem, and consequences, of international indebtedness have continued and worsened. In 2001, Argentina recorded the largest sovereign debt default to date. The global financial meltdown in 2008 highlighted the debt vulnerability of many higher-income countries – not least within the eurozone, where member states faced with the prospect of defaulting (such as Greece, Ireland, and Portugal) were forced to seek massive financial bailouts from their European Union partners and from the IMF during 2010–11.
Bank of England
International Monetary Fund
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