Government debt (also known as public interest, public debt, national
debt and sovereign debt) is the debt owed by a government. By
contrast, the annual "government deficit" refers to the difference
between government receipts and spending in a single year.
Government debt can be categorized as internal debt (owed to lenders
within the country) and external debt (owed to foreign lenders).
Another common division of government debt is by duration until
repayment is due. Short term debt is generally considered to be for
one year or less, long term is for more than ten years. Medium term
debt falls between these two boundaries. A broader definition of
government debt may consider all government liabilities, including
future pension payments and payments for goods and services which the
government has contracted but not yet paid.
Governments create debt by issuing securities, government bonds and
bills. Less creditworthy countries sometimes borrow directly from a
supranational organization (e.g. the World Bank) or international
In a monetarily sovereign country (such as the
United States of
United Kingdom and most other countries, in contrast with
eurozone countries), government debt held in the home currency are
merely savings accounts held at her central bank. In this way this
"debt" has a very different meaning than that of the debt acquired by
households who are restricted by their income. Monetarily sovereign
governments issue their own currencies and do not need this income to
finance spending. In these self-financing nations, government debt is
effectively an account of all the money that has been spent but not
yet taxed back. Their ability to issue currency means they can always
service the interest repayments on these savings accounts. This is why
bonds and gilt-edged securities are considered the safest form of
A central government with its own currency can pay for its spending by
creating money ex novo. In this instance, a government issues
securities not to raise funds, but instead to remove excess bank
reserves (caused by government spending that is higher than tax
receipts) and '...create a shortage of reserves in the market so that
the system as a whole must come to the [central] Bank for liquidity.'
2 Government and sovereign bonds
3 By country
4 Municipal, provincial, or state bonds
5 Denominated in reserve currencies
7 Clearing and defaults
Economic policy basis
9 Structure and risk of a public debt
11 Implicit debt
12 See also
14 External links
The sealing of the
Bank of England
Bank of England Charter (1694)
Early Modern era, European monarchs would often default on
their loans or arbitrarily refuse to pay them back. This generally
made financiers wary of lending to the king and the finances of
countries that were often at war remained extremely volatile.
The creation of the first central bank in England—an institution
designed to lend to the government—was initially an expedient by
William III of England
William III of England for the financing of his war against France. He
engaged a syndicate of city traders and merchants to offer for sale an
issue of government debt. This syndicate soon evolved into the Bank of
England, eventually financing the wars of the
Duke of Marlborough
Duke of Marlborough and
later Imperial conquests.
A new way to pay the National Debt, James Gillray, 1786. King George
III, with William Pitt handing him another moneybag.
The establishment of the bank was devised by Charles Montagu, 1st Earl
of Halifax, in 1694, to the plan which had been proposed by William
Paterson three years before, but had not been acted upon. He
proposed a loan of £1.2m to the government; in return the subscribers
would be incorporated as The Governor and Company of the Bank of
England with long-term banking privileges including the issue of
Royal Charter was granted on 27 July through the passage of
the Tonnage Act 1694.
The founding of the
Bank of England
Bank of England revolutionised public finance and
put an end to defaults such as the
Great Stop of the Exchequer
Great Stop of the Exchequer of
1672, when Charles II had suspended payments on his bills. From then
on, the British Government would never fail to repay its creditors.
In the following centuries, other countries in Europe and later around
the world adopted similar financial institutions to manage their
1815, at the end of the Napoleonic Wars, British government debt
reached a peak of more than 200% of GDP.
Government and sovereign bonds
Main article: government bond
Public debt as a percent of GDP, evolution for USA,
Japan and the main
Public debt as a percent of GDP by CIA (2012)
Government debt as a percent of GDP by IMF (2018)
A government bond is a bond issued by a national government. Such
bonds are most often denominated in the country's domestic currency.
Sovereigns can also issue debt in foreign currencies: almost 70% of
all debt in 2000 was denominated in US dollars. Government bonds
are sometimes regarded as risk-free bonds, because national
governments can if necessary create money de novo to redeem the bond
in their own currency at maturity. Although many governments are
prohibited by law from creating money directly (that function having
been delegated to their central banks), central banks may provide
finance by buying government bonds, sometimes referred to as
monetizing the debt.
Government debt, synonymous to sovereign debt, can be issued
either in domestic or foreign currencies. Investors in sovereign bonds
denominated in foreign currency have exchange rate risk: the foreign
currency might depreciate against the investor's local currency.
Sovereigns issuing debt denominated in a foreign currency may
furthermore be unable to obtain that foreign currency to service debt.
In the 2010 Greek debt crisis, for example, the debt is held by Greece
in Euros, and one proposed solution (advanced notably by World
Pensions Council (WPC) financial economists) is for
Greece to go back
to issuing its own drachma. This proposal would only address
future debt issuance, leaving substantial existing debts denominated
in what would then be a foreign currency, potentially doubling their
This article or section may contain misleading parts. Please help
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General government debt as percent of GDP, United States, Japan,
Interest burden of public debt with respect to GDP.
Debt Clock outside the
IRS office in NYC, April 20, 2012
List of countries by public debt
List of countries by public debt and List of
countries by future gross government debt
Public debt is the total of all borrowing of a government, minus
repayments denominated in a country's home currency. CIA's World
Factbook lists only the percentages of GDP; the total debt and per
capita amounts have been calculated in the table below using the GDP
(PPP) and population figures of the same report.
A debt to GDP ratio is one of the most accepted ways of assessing the
significance of a nation's debt. For example, one of the criteria of
admission to the European Union's euro currency is that an applicant
country's debt should not exceed 60% of that country's GDP.
National public debts greater than 0.5% of world public debt, 2012
estimates (CIA World Factbook 2013)
% of GDP
per capita (USD)
% of world public debt
* US data exclude debt issued by individual US states, as well as
intra-governmental debt; intra-governmental debt consists of Treasury
borrowings from surpluses in the trusts for Federal Social Security,
Federal Employees, Hospital Insurance (Medicare and Medicaid),
Disability and Unemployment, and several other smaller trusts; if data
for intra-government debt were added, "Gross Debt" would increase by
about one-third of GDP. The debt of the
United States over time is
documented online at the Department of the Treasury's website
TreasuryDirect.Gov as well as current totals.
Debt Top 20, 2010 estimate (CIA World Factbook 2011)
% of GDP
per capita (USD)
Note (2008 estimate)
($ 775, 39%)
($ 831, 64%)
($ 571, 41%)
($ 561, 36%)
($ 335, 97%)
($ 392, 58%)
($ 362, 40%)
($ 350, 90%)
($ 385, 87%)
($ 303, 45%)
($ 326, 24%)
Municipal, provincial, or state bonds
Further information: Municipal bond
Municipal bonds, "munis" in the United States, are debt securities
issued by local governments (municipalities).
Denominated in reserve currencies
Governments often borrow money in a currency in which the demand for
debt securities is strong. An advantage of issuing bonds in a currency
such as the US dollar, the pound sterling, or the euro is that many
investors wish to invest in such bonds. Countries such as the United
France have only issued in their domestic
currency (or in the
Euro in the case of
Relatively few investors are willing to invest in currencies that do
not have a long track record of stability. A disadvantage for a
government issuing bonds in a foreign currency is that there is a risk
that it will not be able to obtain the foreign currency to pay the
interest or redeem the bonds. In 1997 and 1998, during the Asian
financial crisis, this became a serious problem when many countries
were unable to keep their exchange rate fixed due to speculative
Main article: Credit risk
Although a national government may choose to default for political
reasons, lending to a national government in the country's own
sovereign currency is generally considered "risk free" and is done at
a so-called "risk-free interest rate." This is because the debt and
interest can be repaid by raising tax receipts (either by economic
growth or raising tax revenue), a reduction in spending, or by
creating more money. However, it is widely considered that this would
increase inflation and thus reduce the value of the invested capital
(at least for debt not linked to inflation). This has happened many
times throughout history, and a typical example of this is provided by
Germany of the 1920s, which suffered from hyperinflation when
the government massively printed money, because of its inability to
pay the national debt deriving from the costs of World War I.
In practice, the market interest rate tends to be different for debts
of different countries. An example is in borrowing by different
European Union countries denominated in euros. Even though the
currency is the same in each case, the yield required by the market is
higher for some countries' debt than for others. This reflects the
views of the market on the relative solvency of the various countries
and the likelihood that the debt will be repaid. Further, there are
historical examples where countries defaulted, i.e., refused to pay
their debts, even when they had the ability of paying it with printed
money. This is because printing money has other effects that the
government may see as more problematic than defaulting.
A politically unstable state is anything but risk-free as it
may—being sovereign—cease its payments. Examples of this
Spain in the 16th and 17th centuries, which
nullified its government debt seven times during a century, and
Russia of 1917 which refused to accept the
responsibility for Imperial Russia's foreign debt. Another
political risk is caused by external threats. It is mostly uncommon
for invaders to accept responsibility for the national debt of the
annexed state or that of an organization it considered as rebels. For
example, all borrowings by the
Confederate States of America
Confederate States of America were left
unpaid after the American Civil War. On the other hand, in the modern
era, the transition from dictatorship and illegitimate governments to
democracy does not automatically free the country of the debt
contracted by the former government. Today's highly developed global
credit markets would be less likely to lend to a country that negated
its previous debt, or might require punishing levels of interest rates
that would be unacceptable to the borrower.
U.S. Treasury bonds denominated in U.S. dollars are often considered
"risk free" in the U.S. This disregards the risk to foreign purchasers
of depreciation in the dollar relative to the lender's currency. In
addition, a risk-free status implicitly assumes the stability of the
US government and its ability to continue repayments during any
Lending to a national government in a currency other than its own does
not give the same confidence in the ability to repay, but this may be
offset by reducing the exchange rate risk to foreign lenders. On the
other hand, national debt in foreign currency cannot be disposed of by
starting a hyperinflation; and this increases the
credibility of the debtor. Usually small states with volatile
economies have most of their national debt in foreign currency. For
countries in the Eurozone, the euro is the local currency, although no
single state can trigger inflation by creating more currency.
Lending to a local or municipal government can be just as risky as a
loan to a private company, unless the local or municipal government
has sufficient power to tax. In this case, the local government could
to a certain extent pay its debts by increasing the taxes, or reduce
spending, just as a national one could. Further, local government
loans are sometimes guaranteed by the national government, and this
reduces the risk. In some jurisdictions, interest earned on local or
municipal bonds is tax-exempt income, which can be an important
consideration for the wealthy.
Clearing and defaults
Main articles: sovereign default, clearing (finance), and default
Public debt clearing standards are set by the Bank for International
Settlements, but defaults are governed by extremely complex laws which
vary from jurisdiction to jurisdiction. Globally, the International
Monetary Fund can take certain steps to intervene to prevent
anticipated defaults. It is sometimes criticized for the measures it
advises nations to take, which often involve cutting back on
government spending as part of an economic austerity regime. In triple
bottom line analysis, this can be seen as degrading capital on which
the nation's economy ultimately depends.
Those considerations do not apply to private debts, by contrast:
credit risk (or the consumer credit rating) determines the interest
rate, more or less, and entities go bankrupt if they fail to repay.
Governments need a far more complex way of managing defaults because
they cannot really go bankrupt (and suddenly stop providing services
to citizens), albeit in some cases a government may disappear as it
Somalia or as it may happen in cases of occupied countries
where the occupier doesn't recognize the occupied country's debts.
Smaller jurisdictions, such as cities, are usually guaranteed by their
regional or national levels of government. When
New York City
New York City declined
into what would have been a bankrupt status during the 1970s (had it
been a private entity), by the mid-1970s a "bailout" was required from
New York State
New York State and the United States. In general, such measures amount
to merging the smaller entity's debt into that of the larger entity
and thereby giving it access to the lower interest rates the larger
entity enjoys. The larger entity may then assume some agreed-upon
oversight in order to prevent recurrence of the problem.
Economic policy basis
According to Modern Monetary Theory, public debt is seen as private
wealth and interest payments on the debt as private income. The
outstanding public debt is an expression of the accumulated previous
budget deficits which have added financial assets to the private
sector, providing demand for goods and services. Adherents of this
school of economic thought argue that the scale of the problem is much
less severe than is popularly supposed.
Wolfgang Stützel showed with his Saldenmechanik (Balances Mechanics)
how a comprehensive debt redemption would compulsorily force a
corresponding indebtedness of the private sector, due to a negative
Keynes-multiplier leading to crisis and deflation.
In the dominant economic policy generally ascribed to theories of John
Maynard Keynes, sometimes called Keynesian economics, there is
tolerance for fairly high levels of public debt to pay for public
investment in lean times, which, if boom times follow, can then be
paid back from rising tax revenues. Empirically, however, sovereign
borrowing in developing countries is procyclical, since developing
countries have more difficulty accessing capital markets in lean
As this theory gained global popularity in the 1930s, many nations
took on public debt to finance large infrastructural capital
projects—such as highways or large hydroelectric dams. It was
thought that this could start a virtuous cycle and a rising business
confidence since there would be more workers with money to spend.
Some[who?] have argued that the greatly increased military spending of
World War II
World War II really ended the Great Depression. Of course, military
expenditures are based upon the same tax (or debt) and spend
fundamentals as the rest of the national budget, so this argument does
little to undermine Keynesian theory. Indeed, some[who?] have
suggested that significantly higher national spending necessitated by
war essentially confirms the basic Keynesian analysis (see Military
Nonetheless, the Keynesian scheme remained dominant, thanks in part to
Keynes' own pamphlet How to Pay for the War, published in the United
Kingdom in 1940. Since the war was being paid for, and being won,
Keynes and Harry Dexter White, Assistant Secretary of the United
States Department of the Treasury, were, according to John Kenneth
Galbraith, the dominating influences on the Bretton Woods agreements.
These agreements set the policies for the Bank for International
International Monetary Fund
International Monetary Fund (IMF), and World Bank,
the so-called Bretton Woods Institutions, launched in the late 1940s
for the last two (the BIS was founded in 1930).
These are the dominant economic entities setting policies regarding
public debt. Due to its role in setting policies for trade disputes,
World Trade Organization
World Trade Organization also has immense power to affect foreign
exchange relations, as many nations are dependent on specific
commodity markets for the balance of payments they require to repay
Structure and risk of a public debt
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Understanding the structure of public debt and analyzing its risk
requires one to:
Assess the expected value of any public asset being constructed, at
least in future tax terms if not in direct revenues. A choice must be
made about its status as a public good—some public "assets" end up
as public bads, such as nuclear power plants which are extremely
expensive to decommission—these costs must also be worked into asset
Determine whether any public debt is being used to finance
consumption, which includes all social assistance and all military
Determine whether triple bottom line issues are likely to lead to
failure or defaults of governments—say due to being overthrown.
Determine whether any of the debt being undertaken may be held to be
odious debt, which might permit it to be disavowed without any effect
on a country's credit status. This includes any loans to purchase
"assets" such as leaders' palaces, or the people's suppression or
International law does not permit people to be held
responsible for such debts—as they did not benefit in any way from
the spending and had no control over it.
Determine if any future entitlements are being created by
expenditures—financing a public swimming pool for instance may
create some right to recreation where it did not previously exist, by
precedent and expectations.
Sovereign debt problems have been a major public policy issue since
World War II, including the treatment of debt related to that war, the
developing country "debt crisis" in the 1980s, and the shocks of the
1998 Russian financial crisis
1998 Russian financial crisis and Argentina's default in 2001.
Government "implicit" debt is the promise by a government of future
payments from the state. Usually this refers to long-term promises of
social payments such as pensions and health expenditure; not promises
of other expenditure such as education or defense (which are largely
paid on a "quid pro quo" basis to government employees and
A problem with these implicit government insurance liabilities is that
it is hard to cost them accurately, since the amounts of future
payments depend on so many factors. First of all, the social security
claims are not "open" bonds or debt papers with a stated time frame,
"time to maturity", "nominal value", or "net present value".
In the United States, as in most other countries, there is no money
earmarked in the government's coffers for future social insurance
payments. This insurance system is called
Alternative social insurance strategies might have included a system
that involved save and invest.
Furthermore, population projections predict that when the "baby
boomers" start to retire, the working population in the United States,
and in many other countries, will be a smaller percentage of the
population than it is now, for many years to come. This will increase
the burden on the country of these promised pension and other
payments—larger than the 65 percent of GDP that it is now. The
"burden" of the government is what it spends, since it can only pay
its bills through taxes, debt, and increasing the money supply
(government spending = tax revenues + change in government debt held
by public + change in monetary base held by the public). "Government
social benefits" paid by the
United States government during 2003
totaled $1.3 trillion.
In 2010 the
European Commission required EU Member Countries to
publish their debt information in standardized methodology, explicitly
including debts that were previously hidden in a number of ways to
satisfy minimum requirements on local (national) and European
(Stability and Growth Pact) level.
Government budget deficit
1980s austerity policy in Romania
Latin American debt crisis
2010 European sovereign debt crisis
United States public debt
National debt of the United States
Credit default swap
Warrant (of Payment)
List of countries by credit rating
List of countries by external debt
List of countries by net international investment position
List of countries by public debt
^ "Bureau of the Public
United States Department of
the Treasury. Archived from the original on October 13, 2010.
Retrieved October 12, 2010.
^ "FAQs: National Debt".
United States Department of the Treasury.
Archived from the original on October 21, 2010. Retrieved October 12,
^ The Economics of Money, Banking, and the Financial Markets 7ed,
Frederic S. Mishkin
^ Tootell, Geoffrey. "The Bank of England's Monetary Policy" (PDF).
Federal Reserve Bank of Boston. Retrieved 22 March 2017.
^ Committee of Finance and Industry 1931 (Macmillan Report)
description of the founding of Bank of England. Books.google.ca. 1979.
ISBN 9780405112126. Retrieved 10 May 2010. "Its foundation
in 1694 arose out the difficulties of the Government of the day in
securing subscriptions to State loans. Its primary purpose was to
raise and lend money to the State and in consideration of this service
it received under its Charter and various Act of Parliament, certain
privileges of issuing bank notes. The corporation commenced, with an
assured life of twelve years after which the Government had the right
to annul its Charter on giving one year's notice. Subsequent
extensions of this period coincided generally with the grant of
additional loans to the State"
^ H. Roseveare, The Financial Revolution 1660–1760 (1991, Longman),
^ Ferguson, Niall (2008). The Ascent of Money: A Financial History of
the World. Penguin Books, London. p. 76.
^ UK public spending Retrieved September 2011
^ "Empirical Research on Sovereign
Debt and Default" (PDF). Federal
Reserve Board of Chicago. Retrieved 2014-06-18.
^ "FT Lexicon" – The Financial Times
^ M. Nicolas J. Firzli, "
Greece and the Roots the EU
Debt Crisis" The
Vienna Review, March 2010
^ "EU accused of 'head in sand' attitude to Greek debt crisis".
Telegraph.co.uk. Retrieved 2012-09-11.
^ "Why leaving the euro would still be bad for both
Greece and the
currency area" – The Economist, 2015-01-17
^ "Country Comparison :: Public debt". cia.gov. Retrieved May 16,
^ "Government – Historical
Debt Outstanding – Annual".
Treasurydirect.gov. 2010-10-01. Retrieved 2011-11-08.
Debt to the Penny (Daily History Search Application)".
Treasurydirect.gov. Retrieved 2014-02-03.
^ "Country Comparison :: Public debt". cia.gov. Archived from the
original on October 15, 2008. Retrieved November 8, 2011.
^ Hedlund, Stefan (2004). "Foreign Debt". Encyclopedia of Russian
History (reprinted in Encyclopedia.com). Retrieved 3 March 2010.
Debts, Deficits and MMT
^ Wolfgang Stützel: Volkswirtschaftliche Saldenmechanik
Tübingen : Mohr Siebeck, 2011, Nachdr. der 2. Aufl., Tübingen,
Mohr, 1978, S. 86
^ "The Economics and Law of Sovereign
Debt and Default" (PDF). Journal
of Economic Literature. 2009. Retrieved 2014-06-18.
^ "Report for Selected Countries and Subjects". International Monetary
Fund. Retrieved 2010-10-12. (General government gross debt 2008
estimates rounded to one decimal place)
^ "Government Social Benefits Table". Archived from the original on
November 1, 2004.
^ "Council Regulation (EC) No 479/2009". Retrieved 2011-11-08.
Wikimedia Commons has media related to Government debt.
The IMF Public Financial Management Blog
OECD government debt statistics
Japan's Central Government Debt
Riksgäldskontoret – Swedish national debt office
United States Treasury, Bureau of Public
Debt – The
Debt to the
Penny and Who Holds It
Slaying the Dragon of Debt, Regional Oral History Office, The Bancroft
Library, University of California, Berkeley
A historical collection of documents on or referring to government
spending and fiscal policy, available on FRASER
Eisner, Robert (1993). "Federal Debt". In
David R. Henderson
David R. Henderson (ed.).
Concise Encyclopedia of Economics (1st ed.). Library of Economics and
Liberty. CS1 maint: Extra text: editors list (link)
OCLC 317650570, 50016270, 163149563
"Government's Borrowing Power". DebatedWisdom. 3IVIS GmbH. Retrieved
29 October 2016.
European national debt clocks
French public debt clock
UK national debt clock
Germany's taxpayers union and debt clock (at the top of the page)
Chinese national debt clock
Canadian Taxpayers Federation debt clock
United States National
CLYPS dataset on public debt level and composition in Latin America
Debtor-in-possession (DIP) financing
Collection · Evasion
Tax refund interception
Consumer leverage ratio
Debt levels and flows
External / Internal / Odious debt
Risk-free interest rate
Employee stock option
Real options valuation
Forward Rate Agreement
Zero Coupon Inflation-Indexed
Zero Coupon Swap
Interest rate future
Stock market index future
Collateralized debt obligation
Collateralized debt obligation (CDO)
Constant proportion portfolio insurance
Contract for difference
Credit-linked note (CLN)
Credit default option
Equity-linked note (ELN)
Foreign exchange derivative
Interest rate derivative
Power reverse dual-currency note (PRDC)