When the government borrows money, it doesn’t go to the bank. It issues debt through treasury bills, bonds, and other financial products. Individuals, corporations, governments and other entities lend the money to that government.
If we want to exclude some countries that recently defaulted or their debt was simply wiped-out because of some political arrangement, almost every country on the planet has debt. It may seem odd, but there’s an explanation for all that.
A country has to create growth. And to create growth, the government has to build the country’s infrastructure. Highways help farmers transport their goods to industries located in the city. At their turn, distributors have to deliver their final product to retail shops. Highways help us move from a place to another whether it’s for pleasure or to get to work. Building the infrastructure increases the productivity of workers and helps investors create more employment.
From where does the government get all that money to build and expand the country’s infrastructure? It simply sells bonds. In other words, it’s borrowing from others. No significant growth can be made without borrowing because the government can’t wait years to collect the necessary budget from taxes to build a bridge or an airport. The core idea of borrowing is to have quick cash in order to build or to create something that will pay back the loan, the interest and on the top of that generate additional profits.
Borrowing for your business
On a smaller scale, you cannot wait years and years to have the amount you need to open a new business or expand your business. It wouldn’t make sense to wait years until you have the amount needed to open a new branch for your business. The same concept applies to governments; it wouldn’t make sense if each time the government wanted to build a highway or a governmental building. By the time the government has the money it may need to build a second bridge. So, if you want to open a start-up company, a new branch or simply expand your business you have to borrow money. Make sure that your business plan will work and that you will be able to pay back the loan, the interest and make more profits.
Borrowing for your family
Governments don’t only borrow money for projects that are directly related to growth. They also build hospitals and parks. They also finance non-lucrative associations and help in many ways. Does that create growth? Not really. But, the government is paying the price of having a better life for its citizens; it’s paying for its values. These kinds of investments are similar to when you borrow to buy a home for your family or to pay their education. They won’t inflate your pocket but they will inflate the happiness of your family values.
Countries have a credit record end risk assessment made by credit rating agencies like Standard and Poor’s, Moody’s and Fitch. They take into consideration the general economy of the country along with other risk factors to issue a rating for that specific country. The report will clearly state how risky it is to lend that country. Most governments try to avoid a default in paying back their debts because no other entity or individual would buy their bonds making it hard for them to continue without being able to borrow.
On the other side, and because you have so many purchases that require credit during a lifetime, Getting a loan will give you a credit history that will help lenders evaluate your credit risk. By creating a credit history, you will have a high chance to get a new business or personal loan. Banks actually look for four variables when studying your loan application and each of these four elements are weighted differently and constitute a certain percentage of your total credit score:
· Your payment history (35%)
· How much you actually owe (30%)
· The types of credit you have (20%)
· How long you’ve had credit (15%)
The above numbers clearly show that borrowing and repaying responsibly is a very important key for your financial future.
Credit has bad consequences if the borrower fails to manage his finances. That’s exactly what happens to governments that don’t wisely manage their “finances”. But, if managed in a good way governments and individuals can transform their loans into financial success.