4.1.2.2.2 Reasons for debt
4.1.2.2.2.1 The reasons for debt
«Loans to fund unprofitable investments or import of
consumer goods, can lead to debts that borrowers cannot repay «(Krugman,
1996). Several reasons may justify the debt.
In literature, debt is related to an imbalance. Three likely
reasons may lead a country to borrow:
·- To finance a high level investment: a country with
a potential productive investment and which has not a very sufficient domestic
savings to finance this investment can borrow;
·- To smooth fluctuations in consumption in case of
loss of income : a theoretical current account deficit may result from negative
exogenous chocks such as declining terms of trade, a recession or a natural
disaster. Thus, to overcome these problems, a country may incur external debt
to maintain the level of absorption;
·-To avoid facing an adjustment to internal and
external imbalances: the unsustainable current account deficit must be adjusted
by changes in economic policies.
Domestic loan has three main reasons:
-financing of budget deficit, public spending being higher
than the State revenue;
-Implementation of monetary policy (open market operations:
purchases or sales of bonds to absorb or inject liquidity);
-Development of the financial market which requires a constant
supply and a range of financial instruments to be traded.
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