For example, sovereigns can borrow from within their own country or from abroad. There are often trade-offs associated with this choice of lender, however. Governments can be very creative in finding potential lenders, as they seek out those who might charge them the lowest interest rate. Again, the long-term benefits should outweigh the cost of borrowing. As well as physical capital, governments can also invest in human capital, such as education and health. But hopefully these investments boost longer-term growth, justifying the borrowing. The up-front costs can be extremely high, and so repayment is spread over many years. Governments might borrow large sums to help build a major new highway, power plant, or subway system. Another motive to borrow is to invest in the future. This “fiscal stimulus” is financed by issuing sovereign debt.īut these reasons cannot typically explain the high level of debt seen in many countries. This is known as “tax smoothing.” Governments may go a step further and actually increase spending, or reduce taxes, during a recession to try to boost growth. This is better for the continuity of public services such as schools and hospitals and means that the government is not forced to cut spending when the economy is already weak-something that could make the situation worse. When tax revenues are down, such as during a recession, governments will borrow to pay for existing spending commitments. There are several economic motives for this. Governments borrow to spend beyond what they can or want to raise through general taxation. ![]() Over the centuries, the sovereign’s debt became sovereign debt: the multitrillion, multinational, multicurrency network of debt obligations that we know today. The loans they gave him were extremely expensive, and when Edward failed to become king of France, he was unable to repay the debt in full. When Edward III of England ran out of money to finance the Hundred Years’ War with France, he turned to the banking families of Florence. ![]() It plays a pivotal role in the world economy but comes with risks
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