Personal Finance, Loans & Insurance

National debt is also known as public or government debt and refers to money owed by the government, whether central, federal, municipal, or local government. Since governments represent the people, national debt may be seen as debt of the taxpayers as well. A certain portion of the taxes that people pay goes directly to paying off national debt. National debt is further categorized into internal and external debt. Internal debt refers to national debt owed to lenders within the country while external debt refers to national debt owed to foreign lenders. Government debt includes all government liabilities, such as pension payments or other payments, which the government has not yet paid. These debts may be short-term debts, which paid for within a year or less; long-term debt, paid for in more than ten years; or medium-term debt, which falls in the middle at about five years.

How Governments Borrow Money

Governments often borrow that they need by issuing securities such as government bonds and bills. Countries who are in a good credit standing can easily borrow money from lenders either within the country or from outside sources. Further, credit standing is based on the country?s ability to pay for what they borrow based on the economic situation of the country and other income generating revenues. Countries who are less credit-worthy sometimes borrow directly from commercial banks or other international financing institutions but are subject to stricter laws and limited amounts of money to borrow.

Countries and governments borrow money in currencies for which the demand is the strongest. The euro and the U.S. dollar are the most common currencies being borrowed because of their popularity among investors and the fact that both are well-known worldwide. Both currencies are also more stable than other currencies in the long run. Lenders rarely invest in other currencies aside from those mentioned because of the risk of not being able to obtain the foreign currency to pay for the interest or to redeem the bonds.