No that's only part of the picture.
A country can borrow money via a bank just like an individual would do and then pay the bank the money back with interest.
They can borrow from another country which is what Ireland did earlier this year when the UK loaned them some money, the reason they did this is because Ireland plays an important role in the UK's economy, if Ireland runs into serious trouble then it could have a small but noticeable effect on the UK economy.
What you hear a lot about though is the bond markets. This is when things get a little more serious with much larger amounts of money being borrowed. A country will create a bond and sell this bond to whoever wants to buy it and promises to pay back the bond on a certain date with interest added onto it.
So let's say the UK needs £1 billion pounds, it might create 1 million bonds at a cost of £1,000 each bond with an interest of 5% to be paid back in 1 year. You buy one of these £1,000 bonds which is like loaning the UK £1,000 pounds of your money and then in 1 years time the UK has promised to buy it back off you for £1,050, so you make £50 profit. Once the UK has sold the 1 million bonds it gets the £1 billion pounds it needs to help run the country.
Once a bond has been created it can be bought and sold on the bond markets (a bit like shares) and obviously this is what drives the interest rates on the bonds.
The problem is that the return rate has to be high enough to tempt the investor to part with their cash. If the investor thinks the risk is higher then they will want a better interest rate on their money. The risk for the investor is the country being so poor that it can't afford to buy the bond back.
If you had a choice to buy a UK bond or a Greece bond then obviously the UK bond is a much safer option for the investor so you might be happy to accept an interest rate of 4% but if it was Greece then you might want 50% as you know that their economy is in tatters and there is a high risk you won't get your money back.
This is why Europe has backed Greece to try and keep Greece's borrowing low. Without the rest of Europe stepping in Greece would go bust overnight as it would simply run out of money as it spends way more than it receives in tax from it's people.
The markets are worried though as it's not only Greece that has got serious problems with debt and they are currently speculating which might be the next country to get into difficulty which is putting up the interest on Italy and Spain.
It's not just Europe though, the USA is in a terrible mess and Japan has been in a mess for the last 15 years.
Everything is in a complete mess and nobody has got an answer for it. Even the experts haven't got a clue as to what is going to happen which is why there is panic in the financial sector.
Chris.
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Borrowing......anyone explain? by 'Smileyman' (05 Aug 2011 @ 11:49)
