Who exactly do whole countries owe money to?(22 Posts)
Excuse my ignorance, but when I read stories like this...
"rising possibility" the US could default on its debt obligations
... I have absoluetly no idea who America is in debt to. Same with Greece, Ireland, Iceland, us.
Who do entire countries owe money to? Are there other countries out there absolutely loaded loaning money here there and everywhere?
I believe most of American money is loaned to it by institutional investors (ie. large pension funds etc), Saudi Arabia and China.
China's actually been quietly buying a lot of Greek/Portugese bonds and has been doing the same for the USA for a long time. The reason is they need to do something with the insane amount of money they have tucked away and if Europe/US economies collapse, they've noone to sell their widgets to.
Unfortunately the balance of trade is so skewed that it's not sustainable long term.
And right now the Republican party still seem to be under the illusion that spending cuts alone will fix their deficit when frankly it's obvious that they need both cuts & tax rises.
If the US defaults on their debts, even for a short time, the loss of investor confidence will have a massive impact across the world. In fact, this was something I predicted a while back. Unfortunately the Republican's are the party of the rich and they won't even consider tax rises.
In theory there is only x amount of money in the world. Certain countries become cash rich due to export volumes and low wages etc. China is rich because it has a huge manufacturing base and a huge workforce and is prepared to undercut to get the business. Japan was v.rich due to the car makers/electronic goods etc and the oil states are rich because of oil. These countries buy/sell debt. An economist can prob. tell you more about the why's and wherefores of all this
Governments owe money to all sorts of people and instituitions that have loaned money or bought bonds from them or supplied goods and srvices. One of the biggets future liabilities is pensioners who are owed a pension by Government.
Therefore, private individuals, pension funds, hedge funds, banks, investment funds, other Governments, IMF, EU, World Bank and firms of all types are owed money by Governments around the world.
It's actually a huge merry go round.
Banks borrow money from other banks so they can lend it to someone else.
The bottom line is that money isn't actually the issue. It's confidence. Once upon a time money was backed by gold ie. "I promise to pay the bearer on demand....."
But now it's not like that at all. So money is merely a measure of confidence. And that's the real fear. If market's lose confidence then economies go to rack & ruin. That's why the government's are so fearful of another banking collapse. It's not ABC bank they are worried about. It's ABC bank who borrowed money off XYZ who in turn borrowed money from 123....who in turn....etc etc
The real warning here though is the fact that the US have a large deficit but crucially not the political will to fix it. And as long as the republican's refuse to raise taxes then one day they'll be forced to default and then the rest of the world will feel the ramifications.
I have never been able to get my head round economics and money and currencies. things like why not just 'write off debt' and 'what happened before money' 'money is just paper' etc. just come into my head!
Basically America is fucked, and within a few months is going to have to stop paying benefits and medicare, or default on it's loans and throw the entire world's economy into meltdown (and probably prompting WW3).
To be clear, 'countries' don't owe money. It's the governments of those countries that are in debt. The people, banks, and companies in a country might as a whole have a lot of money, but the governments owe money.
Basically the government need money that they don't have just now so they mortgage the country to raise some cash.
They do this by selling GILTS on the stock exchange. Investors buy the gilts and it's sort of like they are the bank and the country are the housebuyers. The country have to regularly pay the interest on the gilts (their debt) to the gilt owner and the gilt owner can call the debt in if the country defaults on their payments.
So the country has sold about £2 trillion worth of gilts. But it has about £7 trillion worth of assets. So the actual debt itself isn't the end of the world, we could always sell off Kent, Hampshire and Wiltshire to the French to pay it off.
The problem is the deficit. We're spending more as country than we have coming in. Each year this shortfall (the deficit) has paid so we sell more gilts to raise the cash. So the national debt is spiralling upwards.
So the very short answer is we owe this money to ourselves.
America will probably default on its pensioners because the other options are too scary. Maybe we will end up following suit.
August 3rd will be an interesting day, the social security cheques are unlikely to be paid. If they don't have the cash to pay ss it has to follow that anyone working in the public sector is at risk of not being paid. Riots?
Defaulting on its pensioners??? What do you mean?
So the country has sold about £2 trillion worth of gilts. But it has about £7 trillion worth of assets. So the actual debt itself isn't the end of the world....
There isn't any assets as such though is there? The government can't sell anything really. It's all a matter of confidence and that's what's waning here.
If I had a house and had £100k equity and owed £30k, i have the option of selling the house and paying my creditors. The UK government can't do that. All it can do is either raise taxes or slash spending (or both).
I thought that there were, but I'm definately not an expert. I thought assest were made up of tangible assets, such as land, buildings, businesses, the crown jewels etc, and financial assets such as bank deposits (gold, foreign currency) or stocks and shares.
China.. We all owe money to China. I wonder what would happen of they suddenly demanded all their money back?
The government has lots of assets - any nationalised industry could in theory be sold off to private investors. Just look what's happened in this country - utilities, mobile phone licences, railways, tote bookmakers, they've even tried to sell the forests.
Yes the government does have some assets it could sell but I don't think it's anywhere near the value of our debts.
The fact we even tried to sell our forests shows how desperate we have become. There isn't really any nationalised industries left. Government building's can't be easily sold despite their massive "value". I mean who's going to buy Big Ben? Would we seriously sell Number 10? No.
Land? Who would buy it and what for? We can't exactly sell the land to the chinese can we and say "Tada! This land is now china"
Gold? well Mr Brown already sold half our gold reserves and got £3.5billion for it. Even now we'd probably get nearer £12 billion if we were lucky.
Stocks/shares? Well I guess we sort of own some banks....a few billion there.
My point is the "assets" which the UK have are largely symbolic and not something we could in reality sell. It's like counting your body parts as assets. No matter what debt I was in, I'm not going to be selling off my arms or legs.
I heard the US has been selling off schools. In New Orleans the land that the poor people lived on is being sold off to investors.
If we get really desperate we could sell off the military. In theory the entire public sector could be sold.
Regarding the previous answers about Gilts and Bonds - these instruments rarely remain with the original purchaser.
There are various other trades related to them which take place in the Stock Market whereby they are borrowed by or lent out to other parties who agree to pay or receive a set sum of money at staged intervals during the term of the bond loan.
These third parties are gambling that the money they will receive/ pay from the secondary agreement is more / less than what they receive from the original bond issuer or government.
Sometimes these bonds are lent out three four or even more times again in a chain so you have a huge trail of people all gambling and borrowing and lending on the basis of what someone agreed to pay in interest some time ago. Sometimes the banks even "borrow" their original bonds back for a while if they believe they will get a better interest rate from someone else in the chain.
Therefore if the original issuer (usually a government) defaults it all falls down like dominoes. This will then affect other banks and large companies around the world and the knock on effect could be dramatic.
This is why other countries are desperately trying to keep Greece, Ireland, etc... from defaulting on their payments.
It used to be my job to unravel the trail of government bond payments and receipts for one particular large bank back in the 1990's. Greece used to do huge regular trade though not for massive amounts of money. UK and USA were less prolific but offered a better interest rate for investors
Mind you, when I say not massive amounts of money, where I worked £50m ws considered small and the management didn't get het up much about figures under £100m.
It's not only a different world, it's a complete new universe.
Here we go, I found the official list of UK assets:
An example from that website, the Foreign Office have 1,519.265 million quids worth of prime real estate around world for offices and residential buildings.
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