How do countries borrow money?

8

There is almost no country without debts today. Countries borrow money in the modern economic world and it has not only recently become fashion. Even long time ago, in the times of Roman Empire and Pharaohs, the wealthiest people of that time were lending money to the state to finance public works, wars and for other purposes. Of course the state was obliged to return that money including the agreed interest rate. In the essence, today’s principle is the same, with maybe one difference – there are more instruments developed for the loans: various kinds of credits, bonds and other papers. The countries are also strictly monitored for the risk of lending them money. We also have worldwide institutions specialized in defending macroeconomic stability. They are authorized to grant loans that should help countries to overcome some difficult moments in their history.

International Monetary Fund

Even long time ago, in the times of Roman Empire and Pharaohs, the wealthiest people were lending money to the state to finance public works or wars

International Monetary Fund (IMF) is an institution responsible for keeping world economy in balance and its main assignment is to prevent the global recession. IMF is lending money to the countries that are hit by recession and impose its rules of responsible economic behavior. It is wide known that the recession in one country in the world of open economy soon causes the recessions in other countries that are dependent on it. IMF should prevent this from happening, and prevent from going into the spiral that might pull the whole world into the global recession.

IMF offers a universal model. It will lend money only to those states and countries that are truly dedicated to sterilization of deficit, raising taxes and the interest rates. It has its logic behind that. The raising of the interest rates makes the country more attractive for investments because in that case earnings on its financial markets are bigger. On the other hand, higher interest rates and taxes can cause more risk, so the investors might decide to invest in countries with lower risk. Instead of attracting the money, it may drag it away from the country. The only groups of investors interested in investing in high risk zone are speculators. Instead of recovering, country is drawn to even bigger chaos by speculations. However, the IMF accomplished its goals after its foundation (1945), but it simply no longer has answers for today’s challenges.

Borrowing money from the World Bank

The World Bank is a nonprofit institution responsible for providing loans to poor countries. It was founded after the World War II to support reconstruction of the countries and its main goal is to reduce the poverty through crediting without interest (nonprofit crediting). The World Bank formulated eight “Millennium Development Goals” to reduce the world poverty by 2015. Those are: eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality and empowering women, reducing child mortality rates, improving health, fighting against AIDS/HIV and other diseases, environmental responsibility and developing global partnership for development.

Roman Club and Paris Club

Governments can also borrow money from other countries and banks. There are famous Roman Club and Paris Club often accused in conspiracy theories supporters of debt enslaving by crediting other economies with the sole purpose to conquer foreign markets and to assure monopoly in the world financial market. Officially, these two clubs should help economy development in the middle developed countries by offering them credits to stimulate economy growth in those countries.