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

Koreas Mark 61st Anniversary of War Armistice

Muted observances on both sides of heavily-armed Demilitarized Zone that separates two decades-long enemies More

Judge Declares Washington DC Ban on Public Handguns Unconstitutional

Ruling overturns capital city's prohibition on carrying guns in pubic More

Pricey Hepatitis C Drug Draws Criticism

Activists are using the International AIDS Conference to criticize drug companies for charging high prices for life-saving therapies 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.
Students in Business for Themselvesi
X
Mike O'Sullivan
July 26, 2014 11:04 AM
They're only high school students, but they are making accessories for shoes, fabricating backpacks and doing product photography - all through their own businesses. It's the result of a partnership between a non-profit organization that teaches entrepreneurship and their schools. VOA's Mike O'Sullivan and Deyane Moses met the budding entrepreneurs near Los Angeles.
Video

Video Students in Business for Themselves

They're only high school students, but they are making accessories for shoes, fabricating backpacks and doing product photography - all through their own businesses. It's the result of a partnership between a non-profit organization that teaches entrepreneurship and their schools. VOA's Mike O'Sullivan and Deyane Moses met the budding entrepreneurs near Los Angeles.
Video

Video Astronauts Train in Underwater Lab

In the world’s only underwater laboratory, four U.S. astronauts train for a planned visit to an asteroid. The lab - called Aquarius- is located five kilometers off Key Largo, in southern Florida. Living in close quarters and making excursions only into the surrounding ocean, they try to simulate the daily routine of a crew that will someday travel to collect samples of a rock orbiting far away from earth. VOA’s George Putic has more.
Video

Video Not Even Monks Spared From Thailand’s Junta-Backed Morality Push

With Thailand’s military government firmly in control after May’s bloodless coup, authorities are carrying out plans they say are aimed at restoring discipline, morality and patriotism to all Thais. The measures include a crackdown on illegal gambling, education reforms to promote students’ moral development, and a new 24-hour phone hotline for citizens to report misbehaving monks. Steve Sandford reports from Bangkok.
Video

Video Virtual Program Teaches Farming Skills

In a fast-changing world beset by unpredictable climate conditions, farmers cannot afford to ignore new technology. Researchers in Australia are developing an online virtual world program to share information about climate change and more sustainable farming techniques for sugar cane growers. As VOA's Zlatica Hoke reports, the idea is to create a wider support network for farmers.
Video

Video Airline Expert: Missile will Show Signature on Debris

The debris field from Malaysia Airlines Flight 17 is spread over a 21-kilometer radius in eastern Ukraine. It is expected to take investigators months to sort through the airplane pieces to learn about the missile that brought down the jetliner and who fired it. VOAs Carolyn Presutti explains how this work will be done.
Video

Video Treatment for Childhood Epilepsy Heats up Medical Marijuana Debate

In the United States, marijuana is classed as an illegal drug by the federal government. But nearly half the states have legalized it, to some degree. Proponents say some strains of marijuana might have exceptional health benefits, for treating pain or inflammation in chronic conditions such as cancer, multiple sclerosis and epilepsy. Shelley Schlender reports on a strain of medical marijuana developed in Colorado that is reputed to reduce seizures in childhood epilepsy
Video

Video Airbus Adds Metal 3D Printed Parts to New Jets

By the end of this year, European aircraft manufacturing consortium Airbus plans to deliver the first of its new, extra-wide-body passenger jets, the A350-XWB. Among other technological innovations, the new plane will also incorporate metal parts made in a 3-D printer. VOA's George Putic has more.
Video

Video AIDS Conference Welcomes Exciting Developments in HIV Treatment, Prevention

Significant strides have been made in recent years toward the treatment and prevention of HIV, the virus that causes AIDS. This year, at the International AIDS Conference, the AIDS community welcomed progress on a new pill that may prevent transmission of the deadly virus. VOA’s Anita Powell reports from Melbourne, Australia.
Video

Video IAEA: Iran Turns its Enriched Uranium Into Less Harmful Form

Iran has converted its stockpiles of enriched uranium into a less dangerous form that is more difficult to use for nuclear weapons, according to the United Nations’ Atomic Energy Agency. The move complies with an interim deal reached with Western powers on Iran's nuclear program last year, in exchange for easing of sanctions. Henry Ridgwell reports for VOA from London.

AppleAndroid

World Currencies

EUR
USD
0.7305
JPY
USD
101.53
GBP
USD
0.5830
CAD
USD
1.0656
INR
USD
60.075

Rates may not be current.