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

Sydney Hostage-taker Failed to Manipulate Social Media

Gunman forced captives to use personal Facebook, YouTube accounts to issue his demands; online community helped flag messages, urged others not to share them More

UN Seeks $8.4 Billion to Help War-Hit Syrians

Effort aimed at helping Syrians displaced within their own country and those who've fled to neighboring ones More

Who Are the Pakistani Taliban?

It's an umbrella group of militant organizations whose objective is enforcement of Sharia in Pakistan 'whether through peace or war' 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.
Putin: Russian Economy to Rebound in 2 Yearsi
X
December 18, 2014 5:13 PM
Russian President Vladimir Putin held his annual end-of-the-year news conference Thursday, tackling questions on the Russian economy, the crisis in Ukraine and Russian relations with the west. VOA's Jeff Custer reports.
Video

Video Putin: Russian Economy to Rebound in 2 Years

Russian President Vladimir Putin held his annual end-of-the-year news conference Thursday, tackling questions on the Russian economy, the crisis in Ukraine and Russian relations with the west. VOA's Jeff Custer reports.
Video

Video Nigerians Fleeing Boko Haram Languish in Camp Near Capital

In its five-year effort to impose Islamic law in northeastern Nigeria, the Boko Haram extremist group has killed thousands of people and forced hundreds of thousands to flee. Some of those who ran for their lives now live in squalor on the edges of the capital, Abuja. Chris Stein reports for VOA.
Video

Video Detained Turkish Journalists Follow Teachings of US-Based Preacher

The Turkish government’s jailing of critical journalists has sparked international condemnation and is being seen as an effort to undermine the followers of an ailing Turkish preacher based in the United States. VOA religion reporter Jerome Socolovsky has more.
Video

Video Will Pakistan School Shooting Galvanize Pakistan Against Extremism?

The attack on a military school in Pakistan’s northwest city of Peshawar left 141 dead, including 132 children. Strong statements of condemnation poured in from across the world. The country announced three days of mourning, and the leadership, both political and military, promised retribution. VOA's Ayesha Tanzeem looks at how likely the Pakistani government is to clamp down on all extremist groups.
Video

Video ‘Anti-Islamization’ Marches Increase Tensions In Germany

Anti-immigrant rallies in Germany have been building in recent weeks, peaking Monday night in the city of Dresden where tens of thousands of people turned out to demonstrate against what they call the ‘Islamization’ of the West. Germany has offered asylum to more Syrian refugees than any other country, and this appears to have set off the protests. Henry Ridgwell reports from London.
Video

Video Aceh Rebuilt Decade After Tsunami, But Scars Remain

On December 26, 2004 there was an earthquake in the Indian Ocean so powerful it caused the Earth’s axis to wobble a few centimeters. Onshore on the island of Sumatra, the resulting tsunami was devastating. A decade later, VOA Correspondent Steve Herman reports from Banda Aceh, Indonesia, where although there is little remaining evidence of the physical devastation, the psychological scars among survivors remain.
Video

Video Refugees Living in Kenya Long for Peace in the Home Countries

Kenya is host to numerous refugees seeking safe haven from conflict. Immigrants from Somalia face challenges in their new lives in Kenya. Ahead of International Migrants Day (December 18) Lenny Ruvaga has more for VOA News from the Kenyan capital.
Video

Video Turkey's Authoritarianism Dismays Western Allies

The Turkish government has been defiant in the face of criticism at home and abroad for its raids targeting opposition media. The European Union on Monday expressed dismay after President Recep Tayyip Erdogan lashed out at Brussels for criticizing his government's action. Turkey's bid to be considered for EU membership has been on hold while critics accuse the NATO ally of increasingly authoritarian rule. Zlatica Hoke reports.

All About America

AppleAndroid

World Currencies

EUR
USD
0.8033
JPY
USD
117.19
GBP
USD
0.6372
CAD
USD
1.1634
INR
USD
63.622

Rates may not be current.