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Debt is an obligation that requires one party, the
debtor A debtor or debitor is a legal entity, legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counter ...
, to pay
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
or other agreed-upon value to another party, the
creditor A creditor or lender is a Party (law), party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided s ...
. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The debt may be owed by
sovereign state A sovereign state or sovereign country, is a polity, political entity represented by one central government that has supreme legitimate authority over territory. International law defines sovereign states as having a permanent population, defin ...
or country,
local government Local government is a generic term for the lowest tiers of public administration within a particular sovereign state. This particular usage of the word government refers specifically to a level of administration that is both geographically-loca ...
,
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
, or an individual. Commercial debt is generally subject to
contractual term A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual law of obligations, obligation, the breach of contract, breach of which may give rise to lawsuit, litigation. Not all terms are stated expres ...
s regarding the amount and timing of repayments of principal and
interest In finance and economics, interest is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...
.
Loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
s, bonds, notes, and
mortgages A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners ...
are all types of debt. In
financial accounting Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for p ...
, debt is a type of
financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, Service (economics), services, or Asset, assets for payment. Any transaction involves a change in the status of the finances of two ...
, as distinct from equity. The term can also be used metaphorically to cover
moral A moral (from Latin ''morālis'') is a message that is conveyed or a lesson to be learned from a narrative, story or wikt:event, event. The moral may be left to the hearer, reader, or viewer to determine for themselves, or may be explicitly enca ...
obligations and other interactions not based on a monetary value. For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.


Etymology

The English term "debt" was first used in the late 13th century. The term "debt" comes from "dette, from
Old French Old French (, , ; Modern French: ) was the language spoken in most of the northern half of France from approximately the 8th to the 14th centuries. Rather than a unified language, Old French was a linkage of Romance dialects, mutually intel ...
dete, from Latin debitum "thing owed," neuter past participle of debere "to owe," originally, "keep something away from someone," from de- "away" (see de-) + habere "to have" (see habit (n.)). Restored spelling as usedafter c. 1400. The related term "debtor" was first used in English also in the early 13th century; the terms "dettur, dettour, amefrom Old French detour, from Latin debitor "a debter," from past participle stem of debere;...The -b- was restored in later French, and in English c. 1560-c. 1660." In the
King James Bible The King James Version (KJV), also the King James Bible (KJB) and the Authorized Version, is an Bible translations into English, English translation of the Christian Bible for the Church of England, which was commissioned in 1604 and publis ...
, only one spelling, "debtor", is used.


Principal

Principal is the amount of money originally invested or loaned, on which basis interest and returns are calculated.


Repayment

There are three main ways repayment may be structured: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be
amortized In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execute. ...
over the term of the loan; or the loan may be partially amortized during its term, with the remaining principal due as a " balloon payment" at maturity. Amortization structures are common in
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners ...
s and
credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the credit card issuer, card issuer to pay them for the ...
s.


Default provisions

Debtors of every type default on their debt from time to time, with various consequences depending on the terms of the debt and the law governing default in the relevant jurisdiction. If the debt was secured by specific collateral, such as a car or home, the creditor may seek to repossess the collateral. In more serious circumstances, individuals and companies may go into
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debt ...
.


Types of giving finance


Individuals

Common types of debt owed by individuals and households include
mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners ...
s, car loans,
credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the credit card issuer, card issuer to pay them for the ...
debt, and
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
es. For individuals, debt is a means of using anticipated
income Income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be diff ...
and future
purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
in the present before it has actually been earned. Commonly, people in industrialized nations use consumer debt to purchase houses, cars and other things too expensive to buy with cash on hand. People are more likely to spend more and get into debt when they use credit cards vs. cash for buying products and services.Prelec, D. & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.Raghubir, P. & Srivastava, J. (2008)
Monopoly money: The effect of payment coupling and form on spending behavior
. Journal of Experimental Psychology: Applied, 14 (3), 213–25.
This is primarily because of the transparency effect and consumer's "pain of paying."Soman, D. (2003)
The effect of payment transparency on consumption: Quasi experiments from the field
Marketing Letters, 14, 173–183.
The transparency effect refers to the fact that the further you are from cash (as in a credit card or another form of payment), the less transparent it is and the less you remember how much you spent. The less transparent or further away from cash, the form of payment employed is, the less an individual feels the “pain of paying” and thus is likely to spend more. Furthermore, the differing physical appearance/form that credit cards have from cash may cause them to be viewed as “monopoly” money vs. real money, luring individuals to spend more money than they would if they only had cash available. Besides these more formal debts, private individuals also lend informally to other people, mostly relatives or friends. One reason for such informal debts is that many people, in particular those who are poor, have no access to affordable credit. Such debts can cause problems when they are not paid back according to expectations of the lending household. In 2011, 8 percent of people in the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
reported their households has been in arrears, that is, unable to pay as scheduled "payments related to informal loans from friends or relatives not living in your household".


Businesses

A
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
may use various kinds of debt to
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
its operations as a part of its overall
corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
strategy. A term loan is the simplest form of corporate debt. It consists of an agreement to lend a fixed amount of money, called the principal sum or principal, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans
interest In finance and economics, interest is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...
, calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called " bullet loans", particularly if there is only a single payment at the end – the "bullet" – without a "stream" of interest payments during the life of the loan. A revenue-based financing loan comes with a fixed repayment target that is reached over a period of several years. This type of loan generally comes with a repayment amount of 1.5 to 2.5 times the principle loan. Repayment periods are flexible; businesses can pay back the agreed-upon amount sooner, if possible, or later. In addition, business owners do not sell equity or relinquish control when using revenue-based financing. Lenders that provide revenue-based financing work more closely with businesses than bank lenders, but take a more hands-off approach than
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...
investors. A
syndicated loan A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers. The syndicated loan market is the dominant way for larg ...
is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. A syndicated loan is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. Loan syndication is a
risk management Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as ''the effect of uncertainty on objectives'') followed by coordinated and economical application of resources to minimize, monitor, and con ...
tool that allows the lead banks
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabil ...
the debt to reduce their risk and free up lending capacity. A company may also issue bonds, which are debt
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. Bonds have a fixed lifetime, usually a number of
year A year or annus is the orbital period of a planetary body, for example, the Earth Earth is the third planet from the Sun and the only astronomical object known to harbor life. While large list of largest lakes and seas in the Sola ...
s; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. A
letter of credit A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade International trade is the exchange of Capital (economics), ca ...
or LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the
land development Land development is the alteration of landscape in any number of ways such as: * Changing landforms from a natural or semi-natural state for a purpose such as agriculture or House, housing * subdivision (land), Subdividing real estate into Lot (re ...
process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and traveler's cheque. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice,
bill of lading A bill of lading () (sometimes abbreviated as B/L or BOL) is a document issued by a common carrier, carrier (or their Law of agency, agent) to acknowledge receipt of good (economics), cargo for shipment. Although the term historically related on ...
, and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin. Companies also use debt in many ways for
capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
s and other business
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
s made in their
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.


Governments

Governments issue debt to pay for ongoing expenses as well as major capital projects.
Government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit o ...
may be issued by sovereign states as well as by local governments, sometimes known as municipalities. Debt issued by the government of the United States, called Treasuries, serves as a reference point for all other debt. There are deep, transparent, liquid, and open capital markets for Treasuries. Furthermore, Treasuries are issued in a wide variety of maturities, from one day to thirty years, which facilitates comparing the interest rates on other debt to a security of comparable maturity. In finance, the theoretical " risk-free interest rate" is often approximated by practitioners by using the current yield a Treasury of the same duration. The overall level of indebtedness by a government is typically shown as a ratio of debt-to-GDP. This ratio helps to assess the speed of changes in government indebtedness and the size of the debt due. The United Nations
Sustainable Development Goal 17 Sustainable Development Goal 17 (SDG 17 or Global Goal 17) is about "partnerships for the goals." One of the 17 Sustainable Development Goals established by the United Nations in 2015, the official wording is: "Strengthen the means of implementa ...
, an integral part of the
2030 Agenda The Sustainable Development Goals (SDGs) or Global Goals are a collection of 17 interlinked objectives designed to serve as a "shared blueprint for peace and prosperity for people and the planet, now and into the future".United Nations (2017) R ...
has a target to address the external debt of highly indebted poor countries to reduce debt distress.


Municipalities

Municipal bonds (or muni bonds) are typical debt obligations, for which the conditions are defined unilaterally by the issuing municipality (local government), but it is a slower process to accumulate the necessary amount. Usually, debt or bond financing will not be used to finance current operating expenditures, the purposes of these amounts are local developments, capital investments, constructions, own contribution to other credits or grants.


Assessments of creditworthiness


Income metrics

The debt service coverage ratio is the ratio of income available to the amount of debt service due (including both interest and principal amortization, if any). The higher the debt service coverage ratio, the more income is available to pay debt service, and the easier and lower-cost it will be for a borrower to obtain financing. Different debt markets have somewhat different conventions in terminology and calculations for income-related metrics. For example, in mortgage lending in the United States, a debt-to-income ratio typically includes the cost of mortgage payments as well as insurance and property tax, divided by a consumer's monthly income. A "front-end ratio" of 28% or below, together with a "back-end ratio" (including required payments on non-housing debt as well) of 36% or below is also required to be eligible for a conforming loan.


Value metrics

The loan-to-value ratio is the ratio of the total amount of the loan to the total value of the collateral securing the loan. For example, in mortgage lending in the United States, the loan-to-value concept is most commonly expressed as a " down payment." A 20% down payment is equivalent to an 80% loan to value. With home purchases, value may be assessed using the agreed-upon purchase price, and/or an appraisal.


Collateral and recourse

A debt obligation is considered secured if creditors have recourse to specific collateral. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s of the borrower to satisfy their claims.


Role of rating agencies

Credit bureaus collect information about the borrowing and repayment history of consumers. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. In the United States, the primary credit bureaus are
Equifax Equifax Inc. is an American multinational consumer credit reporting agency headquartered in Atlanta, Atlanta, Georgia and is one of the three largest consumer credit reporting agency, consumer credit reporting agencies, along with Experian and T ...
,
Experian Experian is an American–Irish multinational data analytics and consumer credit reporting company. Experian collects and aggregates information on over 1 billion people and businesses including 235 million individual U.S. consumers and more ...
, and TransUnion. Debts owed by governments and private corporations may be rated by
rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of Default (finance), default ...
, such as
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international ...
,
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on capital stock, stocks, Bond (finance), bonds, ...
,
Fitch Ratings Fitch Ratings Inc. is an American credit rating agency and is one of the "Big Three (credit rating agencies), Big Three credit rating agencies", the other two being Moody's and Standard & Poor's. It is one of the three nationally recognized statis ...
, and A. M. Best. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a
credit rating A credit rating is an evaluation of the credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal an ...
. Moody's uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. Thus a government or corporation with a high rating would have Aaa rating. A change in ratings can strongly affect a company, since its cost of
refinancing Refinancing is the replacement of an existing Collateralized debt obligation, debt obligation with another debt obligation under a different term and interest rate. The terms and conditions of refinancing may vary widely by country, province, or st ...
depends on its creditworthiness. Bonds below Baa/BBB (Moody's/S&P) are considered junk or high-risk bonds. Their high risk of default (approximately 1.6 percent for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on their debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable investment.


Debt markets


Market interest rates


Loans versus bonds

Bonds are debt
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, tradeable on a
bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in th ...
. A country's regulatory structure determines what qualifies as a security. For example, in North America, each security is uniquely identified by a CUSIP for trading and settlement purposes. In contrast,
loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
s are not securities and do not have CUSIPs (or the equivalent). Loans may be sold or acquired in certain circumstances, as when a bank
syndicates A syndicate is a self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest. Etymology The word ''syndicate'' comes from the French language, Frenc ...
a loan. Loans can be turned into securities through the
securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
process. In a securitization, a company sells a pool of assets to a securitization trust, and the securitization trust finances its purchase of the assets by selling
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
to the market. For example, a trust may own a pool of home
mortgages A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners ...
, and be financed by residential mortgage-backed securities. In this case, the asset-backed trust is a debt issuer of residential mortgage-backed securities.


Role of central banks

Central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial bank, commercial banking system. In contrast to a commercial ba ...
s, such as the U.S.
Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
, play a key role in the debt markets. Debt is normally denominated in a particular
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
or
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
, so it can happen even though the borrower and the lender are using the same
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
.


Criticisms

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Some
Islamic banking Islamic banking, Islamic finance ( ar, مصرفية إسلامية), or Sharia-compliant finance is banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously maki ...
forbids lending with interest even today. In hard times, the cost of servicing debt can grow beyond the debtor's ability to pay, due to either external events (income loss) or internal difficulties (poor management of resources). Debt with an associated interest rate will increase through time if it is not repaid faster than it grows through interest. This effect may be termed
usury Usury () is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is ch ...
, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
accepted. In international legal thought,
odious debt In international law, odious debt, also known as illegitimate debt, is a legal theory that says that government debt, the national debt incurred by a despotic regime should not be enforceable. Such debts are, thus, considered by this doctrine to be ...
is debt that is incurred by a regime for purposes that do not serve the interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. International Third World debt has reached the scale that many
economist An economist is a professional and practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
s are convinced that debt relief or debt cancellation is the only way to restore global equity in relations with the developing nations. Excessive debt accumulation has been blamed for exacerbating economic problems. For example, before the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The Financial contagion, ...
, the
debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured i ...
was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a
credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
followed.
Deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand. At the household level, debts can also have detrimental effects — particularly when households make spending decisions assuming income will increase, or remain stable, in years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home repairs. Over-indebtedness has severe social consequences, such as financial hardship, poor physical and mental health, family stress, stigma, difficulty obtaining employment, exclusion from basic financial services (
European Commission The European Commission (EC) is the Executive (government), executive of the European Union (EU). It operates as a cabinet government, with 27 European Commissioner, members of the Commission (informally known as "Commissioners") headed by a P ...
, 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim ''et al.'', 2003), feeling of insecurity, and relational tensions.


Levels and flows

Global debt
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabil ...
grew 4.3 percent year-over-year to during 2004.


History

According to historian Paul Johnson, the lending of "food money" was commonplace in
Middle East The Middle East ( ar, الشرق الأوسط, ISO 233: ) is a geopolitical region commonly encompassing Arabian Peninsula, Arabia (including the Arabian Peninsula and Bahrain), Anatolia, Asia Minor (Asian part of Turkey except Hatay Pro ...
ern civilizations as early as 5000 BC. Religions like Judaism and Christianity for example, demand that debt be forgiven on a regular basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment. An example is the Biblical Jubilee year, described in the
Book of Leviticus The book of Leviticus (, from grc, Λευιτικόν, ; he, וַיִּקְרָא, , "And He called") is the third book of the Torah (the Pentateuch) and of the Old Testament, also known as the Third Book of Moses. Scholars generally agree ...
. Similarly, in
Deuteronomy Deuteronomy ( grc, Δευτερονόμιον, Deuteronómion, second law) is the fifth and last book of the Torah (in Judaism), where it is called (Hebrew: hbo, , Dəḇārīm, hewords f Moses label=none) and the fifth book of the Chr ...
chapter 15 and verse 1 states that debts be forgiven after seven years. This is because biblically debt is seen as both the creditor and debtor responsibility. Traditional Christian teaching holds that a lifestyle of debt should not be normative; the Emmanuel Association, a
Methodist Methodism, also called the Methodist movement, is a group of historically related Christian denomination, denominations of Protestantism, Protestant Christianity whose origins, doctrine and practice derive from the life and teachings of John W ...
denomination in the
conservative holiness movement The conservative holiness movement is a loosely defined group of theologically conservative Christian denominations with the majority being Methodist Methodism, also called the Methodist movement, is a group of historically related Chris ...
, for example, teaches: "We are to refrain from entering into debt when we have no reasonable plan to pay. We are to be careful to meet all financial engagements promptly when due, if at all possible, remembering that we are to 'Provide things honest in the sight of all men' and to 'owe no man any thing, but to love one another' (Romans 12:17; 13:8)."


Further reading

* World Bank, 2019
''Global Waves of Debt: Causes and Consequences''
Edited by M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge, and Naotaka Sugawara.


See also

* Debt theory of money *
Debt deflation Debt deflation is a theory that recession In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
* World debt


References

{{Authority control Credit Personal financial problems Financial law