• 25Oct

    How do countries borrow money?

    There is almost no country without debt today. Countries borrow money in the modern economic world, and it has not only recently become fashion. Even a long time ago, in the times of the 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 essence, today’s principle is the same, with maybe one difference – there are more instruments developed for 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

    Money cycle

    Even long time ago, in the times of the 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 widely 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 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 and raising taxes and interest rates. Here is its logic. The raising of the interest rates makes the country more attractive for investments because 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 money, it may divert it away from the country. The only groups of investors interested in investing in high-risk zones are speculators. Instead of recovering, the country is drawn into even greater chaos by speculations. However, the IMF began to accomplish these 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 World War II to support reconstruction of the affected countries, and its main goal is to reduce 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 AIDS/HIV and other diseases; fostering environmental responsibility; and developing global partnership for development.

    Roman Club and Paris Club

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

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