Debt is something that affects more than just your everyday consumer and when trying to perceive the current financial situation, parties should attempt to understand how debt and the possible debt crisis will affect, not only them, but countries as a whole. Knowing just how debt affects consumers could be helpful in understanding why a debt crisis occurs.
Debt Crisis happens when many countries around the world become stuck in the vicious cycle of debt, and the resulting, skyrocketing interest payments.
The interest payment rises steadily, and after a while, becomes almost half the National Foreign Currency Reserves. A debt crisis has happened in Latin American and Caribbean countries in the past, triggering huge money problems, though, it can happen anywhere if the government are irresponsible in their spending policies.
When governments borrow more to pay existing loans or to finance infrastructure projects and such big ticket items, a debt crisis is likely to occur. This was seen most clearly when the US banks raised interest rates without warning and with utter disregard to existing agreements, causing other banks to follow suit and leaving third world countries floundering with astronomical amounts of debt.
Though some efforts were made to refinance and reduce debt crisis on the cash-strapped developing countries and thus avert the debt crisis, these were only for cosmetic purposes. Between the years 1982-96, Latin American and Caribbean countries paid $739 billion in interest alone, which is more than the outstanding principal – but these countries are still forced to borrow to fund their education programs, healthcare, etc. Luckily, the ‘Washington Consensus’ soon evolved, which made it mandatory for wealthy northern nations to offer some debt relief to the less fortunate developing nations, in turn possibly stopping the debt crisis.
Such debt repayment agreements are overseen and implemented by the World Bank and the IMF and they may require raising interest rates, liberalizing trade or increasing export-oriented production, etc. Though the intentions were good, these measures only served to worsen the situation – undermining local industry, increasing unemployment and thereby leading to more poor people and denied credit to farmers and small entrepreneurs. Is it any wonder that there is a debt crisis looming?