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

Philippines, Muslim Rebels Try to Salvage Peace Pact

Peace process faces major setback after botched military operation to find terrorists results in bloody gunbattle between government forces, Moro Islamic Liberation Front fighters More

Republicans Expect Long, Expensive Presidential Battle

Political strategist says eventual winner will be one who can put together strongest coalition of various conservative groups that make up Republican Party More

Video New Wheelchair Is Easier to Use, Increases Mobility

Engineers have come up with a lever-operated design that makes use of easily accessible bicycle technology 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.
Islamic State Prisoners Talk of Curiosity, God, Regreti
X
Zana Omer
March 28, 2015 1:19 AM
Islamic State fighter, a prisoner of Kurdish YPG forces, asked his family asking for forgiveness: "I destroyed myself and I destroyed them along with me." The Syrian youth was one of two detainees who spoke to VOA’s Kurdish Service about the path they chose; their names have been changed and identifying details obscured. VOA's Zana Omer reports.
Video

Video Islamic State Prisoners Talk of Curiosity, God, Regret

Islamic State fighter, a prisoner of Kurdish YPG forces, asked his family asking for forgiveness: "I destroyed myself and I destroyed them along with me." The Syrian youth was one of two detainees who spoke to VOA’s Kurdish Service about the path they chose; their names have been changed and identifying details obscured. VOA's Zana Omer reports.
Video

Video Germanwings Findings Raise Issue of Psychological Testing for Pilots

More is being discovered about the co-pilot in the crash of Germanwings Flight 9525 in the French Alps. Investigators say he was hiding a medical condition, raising questions about the mental qualifications of pilots. VOA's Carolyn Presutti reports.
Video

Video Hi-tech Motorbike Helmet's Goal: Improve Road Safety

In cities with heavily congested traffic, people can get around much faster on a motorcycle than in a car. But a rider who is not sure of his route may have to stop to look at the map or consult a GPS. A Russian start-up company is working to make navigation easier for motorcyclists. Designers at Moscow-based LiveMap are developing a smart helmet with a built-in navigation system, head-mounted display and voice recognition. Zlatica Hoke has more.
Video

Video New Wheelchair Is Easier to Use, Increases Mobility

Traditional push-rim wheelchairs create a lot of stress for arm, shoulder and neck muscles and joints. A redesigned chair, based on readily available bicycle technology, radically increases mobility while reducing the physical effort. VOA’s George Putic reports.
Video

Video Liberia's Almost Last Ebola Patient Grateful but Still Grieving

Beatrice Yardolo was to make history as Liberia’s last Ebola patient. Liberians recently started counting down 42 days, the period that has to go by without a single new infection until the World Health Organization can declare a country Ebola-free. That countdown stopped on March 20 when there was another new case of Ebola, making Yardolo’s story a reminder that Ebola is far from over. Benno Muchler reports from Monrovia.
Video

Video Cambodian Land Grabs Threaten Traditional Communities

Indigenous communities in Cambodia's Ratanakiri province say the government’s economic land concession policy is taking away their land and traditional way of life, making many fear that their identity will soon be lost. Local authorities, though, have denied this is the case. VOA's Say Mony went to investigate and filed this report, narrated by Colin Lovett.
Video

Video Virginia Tavern Takes Patrons Back to Medieval Times

European martial arts are not widely practiced and are unknown by most people. A tavern in Old Town Alexandria, outside Washington, wants to change this by promoting these fighting techniques from medieval times. Through combining visual arts, martial arts and culinary arts, this tavern brings medieval history back to life. VOA's Yang Lin and Helen Wu report.
Video

Video Space Program Status Disappoints 'Last Man on the Moon'

One of the films that drew big crowds last week at the annual South by Southwest festival in Austin, Texas, tells the story of the last human being to stand on the moon, U.S. astronaut Eugene Cernan. It has been 42 years since Cernan returned from the moon and he laments that no one else has gone there since. VOA’s Greg Flakus reports.

VOA Blogs

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
0.9211
JPY
USD
119.18
GBP
USD
0.6722
CAD
USD
1.2509
INR
USD
62.518

Rates may not be current.