News / Economy

Worries About Government Borrowing Stir Markets

Worries about government borrowing are a key reason for the recent downgrade of U.S. debt, the economic crisis in Europe, and the wild swings from gains to losses and back again on global financial markets.

A bond is an agreement between a borrower and a lender.  In government bonds, the lender provides money used to build bridges, schools, or pay for other things governments need, and the government promises to repay the money in a specific period of time.

Finance Professor Gerry Hanweck of George Mason University says these bonds, which are written agreements by borrowers to pay someone in the future, are often sold.  The buyer of the debt pays the original investor in the hope of making a larger amount of money in the future.  "They are registered on exchanges, and traded electronically in huge markets.  One of the biggest markets in the world," he said.

That gain would come in part from interest, a fee that borrowers pay to lenders.  Think of it as rent.  If you rent an apartment, you get to use that living space for a specific period of time, say one year, in return for an agreed amount of money.  Bonds work pretty much the same way.  A government gets to use money for a period of years, if it agrees to return the original loan money and an additional fee, or interest.

It is very important for lenders to determine just how likely the borrower is to repay the loan and the interest and do it on time, in full, as agreed.  The recent one-level downgrade of the U.S. credit rating by Standard & Poor's showed the agency's opinion that Washington became slightly less likely to pay its bills.

A group that urges Washington to manage its money better, the Center for A Responsible Federal Budget, says the ugly spectacle of partisan bickering in Washington damaged the country's once top-level credit.  "(S&P) has lost confidence in the American political system to make hard choices when push comes to shove," he said.

Mark Goldwein is the group's policy director and he says this downgrade could be the first in a series unless Washington shows it can better manage both its budget and politics.

A credit rating downgrade means the agency thinks there is greater risk of default, or non-payment.  Credit rating downgrades usually mean investors demand higher and higher interest rates to make loans.  The higher rates are called a "risk premium."  Goldwein says each downgrade can raise the interest rate, which raises the borrowing costs, which makes the financial situation worse, perhaps leading to additional downgrades in a downward cycle.

But that is not what has happened to Washington.  Instead of interest rates on U.S. bonds going sharply higher, they have actually fallen.

That is because many investors still consider the United States to be the safest place in the world to put their money.  Finance Professor Walter Schreiber of La Salle University says low interest rates are a measure of that confidence. "I think you can tell from the rates that they are demanding, that people are very confident that the united states will pay them back," he said.

The current economic tensions mean there is a surge in the number of investors seeking out U.S. bonds as a safe place to keep their money until the economy improves.  With more and more investors seeking bonds, Washington can offer lower and lower interest rates to borrow the money.

Those same economic worries also affect the prices on the stock market.  But stocks are different than bonds.  Bonds are loans, with a promise to repay a specific amount of money at an agreed date. Stocks are shares of a company.  Stockholders are buying a part ownership in the company, with no promise that their investment will be repaid.  Stockholders make their investments in the hope that the value of the company will grow, and they can sell their stock at a higher price in the future, and make a profit.

You May Like

Brutality Eroding IS Financial Support

Director of National Intelligence James Clapper says IS's penchant for publicizing beheadings, other brutal forms of punishment hurts group’s bottom line More

Studies: Climate Change a Factor in Disasters in Syria, California

The studies point to the possibility of clear and present dangers from a threat often considered to be far in the future More

Video Afghan Refugees Complain of Harassment in Pakistan

Afghan officials and human rights organizations assert that Pakistani authorities are using deadly attack at school in Peshawar as pretext to push out Afghan refugees More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Kerry Seeks Assurances of Russian Non-Interference in Ukrainei
X
March 03, 2015 3:11 AM
U.S. Secretary of State John Kerry has told his Russian counterpart, Sergei Lavrov, that his country could face further consequences to what he called its “already strained economy” if Moscow does not fully comply with a cease-fire in Ukraine. The two met, on Monday, on the sidelines of a U.N. Human Rights Council meeting in Geneva, where Kerry outlined human rights violations in Russian-annexed Crimea and eastern Ukraine. VOA State Department correspondent Pam Dockins reports from Geneva.
Video

Video Kerry Seeks Assurances of Russian Non-Interference in Ukraine

U.S. Secretary of State John Kerry has told his Russian counterpart, Sergei Lavrov, that his country could face further consequences to what he called its “already strained economy” if Moscow does not fully comply with a cease-fire in Ukraine. The two met, on Monday, on the sidelines of a U.N. Human Rights Council meeting in Geneva, where Kerry outlined human rights violations in Russian-annexed Crimea and eastern Ukraine. VOA State Department correspondent Pam Dockins reports from Geneva.
Video

Video Smartphones May Help in Diagnosing HIV

Diagnosing infections such as HIV requires expensive clinical tests, making the procedure too costly for many poor patients or those living in remote areas. But a new technology called lab-on-a-chip may make the tests more accessible to many. VOA’s George Putic reports.
Video

Video Afghan Refugees Complain of Harassment in Pakistan

Afghan officials have expressed concern over reports of a crackdown on Afghan refugees in Pakistan following the Peshawar school attack in December. Reports of mass arrests and police harassment coupled with fear of an uncertain future are making life difficult for a population that fled its homeland to escape war. VOA’s Ayesha Tanzeem reports from Islamabad.
Video

Video Ukrainian Volunteers Prepare to Defend Mariupol

Despite the ongoing ceasefire in Ukraine, soldiers in the city of Mariupol fear that pro-Russian separatists may be getting ready to attack. The separatists must take or encircle the city if they wish to gain land access to Crimea, which was annexed by Russia early last year. But Ukrainian forces, many of them volunteers, say they are determined to defend it. Patrick Wells reports from Mariupol.
Video

Video Moscow Restaurants Suffer in Bad Economy, Look for Opportunity

As low oil prices and Western sanctions force Russia's economy into recession, thousands of Moscow restaurants are expected to close their doors. Restaurant owners face rents tied to foreign currency, while rising food prices mean Russians are spending less when they dine out. One entrepreneur in Moscow has started a dinner kit delivery service for those who want to cook at home to save money but not skimp on quality. VOA's Daniel Schearf reports.
Video

Video US, Cuba Report Progress in Latest Talks to Restore Ties

The United States and Cuba say they have made progress in the second round of talks on restoring diplomatic relations more than 50 years after breaking off ties. Delegations from both sides met in Washington on Friday to work on opening embassies in Havana and Washington and iron out key obstacles to historic change. VOA’s Mary Alice Salinas reports from the State Department.
Video

Video Presidential Hopefuls Battle for Conservative Hearts and Minds

One after another, presumptive Republican presidential contenders auditioned for conservative support this week at the Conservative Political Action Conference held outside Washington. The rhetoric was tough as a large field of potential candidates tried to woo conservative support with red-meat attacks on President Barack Obama and Democrats in Congress. VOA Political Columnist Jim Malone takes a look.
Video

Video NYC's Restaurant Week: An Economic Boom in Fine Dining

New Yorkers take pride in setting world trends — in fashion, the arts and fine dining. The city’s famous biannual Restaurant Week plays a significant role in a booming tourism industry that sustains 359,000 jobs and generates $61 billion in yearly revenue. VOA's Ramon Taylor reports.
Video

Video Brookhaven at Cutting Edge of US Energy Research

Issues like the Keystone XL pipeline, fracking and instability in the Middle East are driving debate in the U.S. about making America energy independent. Recently, the American Energy Innovation Council urged Congress and the White House to make expanded energy research a priority. One beneficiary of increased energy spending would be the Brookhaven National Lab, where clean, renewable, efficient energy is the goal. VOA's Bernard Shusman reports.
Video

Video Southern US Cities Preserve Civil Rights Heritage to Boost Tourism

There has been a surge of interest in the American civil rights movement of the 1950s and '60s, thanks in part to the Hollywood motion picture "Selma." Five decades later, communities in the South are embracing the dark chapters of their past with hopes of luring tourism dollars. VOA's Chris Simkins reports.
Video

Video Deep Under Antarctic Ice Sheet, Life!

With the end of summer in the Southern hemisphere, the Antarctic research season is over. Scientists from Northern Illinois University are back in their laboratory after a 3-month expedition on the Ross Ice Shelf, the world’s largest floating ice sheet. As VOA’s Rosanne Skirble reports, they hope to find clues to explain the dynamics of the rapidly melting ice and its impact on sea level rise.
Video

Video Lao Dam Project Runs Into Opposition

A Lao dam project on a section of the Mekong River is drawing opposition from local fishermen, international environmental groups and neighboring countries. VOA's Say Mony visited the region to investigate the concerns. Colin Lovett narrates.

All About America

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

World Currencies

EUR
USD
0.8907
JPY
USD
119.77
GBP
USD
0.6496
CAD
USD
1.2492
INR
USD
61.941

Rates may not be current.