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Why reaching a level of "zero debt" can be bad for a country - Fintech Morning

Why reaching a level of “zero debt” can be bad for a country

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Nobody likes to owe money, it’s true. But when it comes to a country with healthy finances, borrowing money to make investments and boost economic growth is a good strategy, experts say.

On the contrary, if prosperous countries like Norway, Sweden or Switzerland —whose level of debt is very low— did not ask for loans in the financial markets, they would be missing the opportunity to continue developing and becoming even richer.

“Having debt is not something bad or good in itself. It depends on the country and the financing conditions you can get,” says Hugo Osorio, deputy manager of Investment Strategies at the financial services firm Falcom Asset Manager, in a dialogue with BBC Mundo.

For those countries with a high level of savings, little deficit and their fiscal accounts in order, having “zero debt” is not an aspiration.

Nor is it for a company seeking financing to continue growing.

Different is the case of a person, a company or a country that is with the noose around its neck for the payment of interest. If you’re about to go bankrupt, your ultimate aspiration would be to have “zero debt.”

However, the largest economies can withstand gigantic levels of debt because at the end of the day the markets have confidence in them and, if their credit rating is good, public debt does not keep them awake at night .

Lingotes de oro

Just look at what is happening in Japan, the third largest economy after the United States and China, and the most indebted in the world among developed countries.

Its public debt reaches 256% of the Gross Domestic Product (GDP). Are you about to go bankrupt? No. Basically because the rest of the world trusts the country’s stability and its risk rating is good.

The unusual day the US had “zero debt”

The United States, with an accumulated debt of 133% of GDP, continues to enjoy international confidence and Treasury bonds are considered one of the safest havens for investors’ capital in the face of instability, as is happening now with the crisis in Ukraine.

Jerome Powell
The US Federal Reserve, led by Jerome Powell, has bought a significant part of the debt issued by the country.

While it is true that in 1835 the US decided to pay all its financial commitments, reaching “zero debt”, the world has changed so much since then that no president in his right mind would consider doing it again.

Another thing is the political discussion that exists in the country about how high the indebtedness is and how damaging it is for the economy, especially now that the US debt escalated rapidly due to the increase in public spending on the rescue packages for mitigate the effects of the pandemic .

And that is precisely one of the great debates at the global level: the great increase in public debt in the midst of the pandemic and how countries will now face the challenge of reducing fiscal spending in the midst of a rampant inflationary wave and slow economic growth. projected for this year.

But how much is an acceptable level of debt? That depends on each country.

Argentina has a net debt of 102%, according to the latest data from the International Monetary Fund, IMF, and although it is lower than that of the United States, its level of risk is completely different.

The other side of the coin are the countries sunk in the mud like Afghanistan or Haiti, whose public debt is very low , but that is not a sign of economic well-being.

How does the system work?

To obtain financing, countries issue debt with the commitment to pay the creditor an interest rate in a given time.

One of the most used instruments for financing is the issuance of bonds. These can be acquired, for example, by individuals, investment funds, other countries or the central bank of the same issuing country.

Afganos
Afghanistan and Haiti are some of the countries with the lowest public debt in the world.

Instead of requesting a loan from a bank or an international organization, countries place bonds on the market offering a return to the investor.

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With these funds, a government can finance infrastructure works such as an airport, invest them in education, or in any project that requires disbursing resources from fiscal coffers.

You can also refinance your current debt with new debt on better terms.

Bonds, like other debt issuance instruments, are another way of raising money, such as taxes or income from public companies.

If the country has a higher level of risk, the bond pays more interest to the lender and if, on the contrary, the country has a reliable economy, its bond pays less interest because the investor is at low risk.

On the other hand, that a country issues debt does not mean that it does not have savings .

Tokio, Japón
Japan’s public debt is at 256% of GDP, the highest of any developed country.

“Governments want to boost growth and part of a strategy to boost growth is to issue debt,” Elijah Oliveros-Rosen, senior economist at the Latin America Global Economics & Research division of the consulting firm S&P Global Ratings, tells BBC Mundo.

“The important thing is that what you pay in interest is less than what you collect with the investment you made.”

On the other hand, explains the economist, countries need to ensure a stable budget.

And, in that sense, “the debt guarantees you that you have the income to be able to meet that budget” beyond what may happen with the variation in your income.

The issuance of debt is, after all, a letter of stability.

“We must find a balance”

People often have the concept that they can rest when they pay the mortgage debt on their house because the asset belongs to them.

“The problem is that they are undervaluing the opportunity cost of that debt,” argues Manuel Romera, director of the financial sector at IE Business School in Spain.

Poster with the figure of the US public debt
In the US and Europe there is an intense debate about the increase in the level of public debt in times of pandemic.

But there are people, he adds, who when they finish paying off the loan, mortgage their house to invest the money they have received for that mortgage in the stock market.

As in the stock market they earn much more in the long term than what the debt costs them, they get an extra return, in addition to continuing to live at home, he says in dialogue with BBC Mundo.

This idea of ​​borrowing to invest is similar to what happens with the States, points out the economist.

“When States get more indebted, they give their own State more power structure because they ask the rest of the world for money to invest in society.”

“You have to find a balance. Staying with zero debt is bad, just as it would be terrible to borrow excessively .”

Link: https://www.bbc.com/mundo/noticias-60484962

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  • BBC News World

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Edinson Love
https://fintechmorning.com

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