Who is global debt owed too?

tdowson

I'd really like to understand - and I can't believe I'm alone in not understanding so I hope this is the right place to ask as all the investment markets are constantly talking about national debts!

The US and most European countries are 'in debt'. Who do they owe the money to exactly? Where did the money being lent to debtor nations come from originally?

Last week The BoE, US Federal Reserve, ECB, Swiss National Bank and the Bank of Japan all agreed to inject money markets with dollars. Where did this money come from - if the countries of these banks are themselves are already in debt? And why dollars, and where did the non-US central banks get their dollars from?

When money markets talk of Greece and other in-debt countries bonds and yields, what are these exactly, and who is lending Greece and other debtor countries the money, and where does this money come from?

Thank you!

jon3001

China.....

atush

It comes from thos govts borrowing via their own Bonds/Govt debt.

Owned by China, and banks, some funds and your pensions. Good news is that pensions and funds probably don't hold greek debt as they probably go for US, UK, Swiss or Japanese debt.

Sceptic001

UK Govt debt
http://news.bbc.co.uk/1/hi/business/8530150.stm

US Govt debt
http://en.wikipedia.org/wiki/File:Estimated_ownership_of_treasury_securities_by_year.gif

Rafter

Most of the government debt in a country bellongs to its own people.

If you have a pension fund or any money in a bank or building society, some of that money will be invested in government gilts.

The big 'deficit' countries including the UK and US have borrowed lots from surplus countries like China and the middle east.

And some of the money is simply grown on trees. The UK has printed £200bn so far which has helped free up other money for mortgages and business investment but also causes inflation which makes every pound your own or have saved worth that bit less.

All very depressing and all because 'we' all got far too carried away in the noughties buying things we couldn't really afford and paying on the never never. That 'we' includes both people and governments.

The good news is the UK is still a safe place to do business and has many language and geographical advantages, which means that in time things should calm down again and we get back to a rising standard of living. But the pain ain't over yet.

R.

tdowson

Thanks for the answers so far.

OK, so how come some countries end up with debt while others become lenders?

Also, how can institutions within the country, e.g. pension funds, the Bank of England, be lending money to the goverment (by way of buying gilts)? In other words, how can institutions within the country be more flush for cash than the country as a whole? It seems an odd state of affairs (which I guess is why we are in this state).

How have the UK, the US, and other debtor nations, been quietly running up their debts to such levels over the last decades without it being obvious? Have they been constantly issuing gilts?

Also, how do gilts work? What is the mechanism, interest, repayment timescales etc.? I read somewhere that Greek gilts are now around 25% interest (is that per annum?) which supposedly equated to the market considering Greece a 98% chance of default. Now, surely no-one would lend at just 25% p.a. return if there was a 98% chance you won't get your money back. So how does the return on gilts work?

Does default (Government) mean the whole debt is written off, or just that an interest payment get missed?

Lokolo

It goes like this:

The government gets income of say £100.
The government is spending £110.

To get that £10 they give out bonds, which means people (companies, individual investors etc.) give that £10 to the government in return for interest. So a GILT may be a 2015 3% issue, which means the investor will give up the £10 until 2015, but in return, get 3% a year, then when 2015 the government give back the £10.

And the debt hasn't been obviously because no-one has really cared. China and such never got into this place, so instead of spending £110, they spend £90, so they actually have money left over.

You can think of it like your income. You take home £2,000, but you only actually need to spend £1900, so you save the other £100.

China in this case uses its spare capital to buy US Gilts, they do this to keep the exchange rate in their favour.

As for Greece, yes, they have a very high chance of default but as you've said, they are offering 25% interest (although I think it's higher than this in reality!) so there will be people who will take this risk. The price of the bond will keep lowering and lowering until there is a price where people think "Actually, thats really cheap, I'll take a punt on it not defaulting".

A default is where a payment is missed. Obviously the payment could be made up in the future, but it's pretty unlikely. I am not sure what would happen is Greece go bankrupt though,.

talexuser

Lokolo wrote: »

I am not sure what would happen is Greece go bankrupt though,.

If they don't get out of the Euro and devalue by 50% or something, then maybe they do the Argentina trick and just offer 35cents in the $ for the loans at double the timescale and the people owed just have to lump it?

MoneyJuggler

Not trying to hijack the thread, but wanted to say thank you to the OP for the question, and everyone else for the answers -really interesting, and something I've been meaning to try and understand more

Biggles

I've just been listening to the BBC's More Or Less podcast from 12 Aug, it's explained well there, starting at 13:30 mins

HAMISH_MCTAVISH

tdowson wrote: »

OK, so how come some countries end up with debt while others become lenders?

In the case of China, because they manipulated the currency for the last few decades.

As for who do we owe the UK debt to, it's mostly to ourselves.....