Debt Management Crisis

Is not only individual consumers that feel the burden of debt, thus when attempting to understand a financial situation, all affected parties should understand how debt and the possible debt management crisis will touch, not only them, but all continents and countries as a whole. Understanding how debt affects consumers and developing nations could be helpful in understanding why a debt management crisis occurs.

When governments borrow more to pay existing loans or to finance infrastructure projects and such big ticket items, a debt management 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.

Typically this happens when governments borrow more to pay existing loans or to finance infrastructure projects and such big ticket items. Across the developing nations, this was felt when the US banks raised increased interest rates without warning and with utter disregard to existing agreements; many other banks followed suit and left third world countries floundering with astronomical amounts of debt and that generally starts the debt management 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 management crisis looming?

Though some efforts were made to refinance and reduce debt management crisis on the cash-strapped developing countries and thus avert the debt management 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 management crisis.

Debt management 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 management 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.

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