People borrow money from banks, financial institutions and family and friends. Businesses borrow from financial institutions and they can also raise money by selling their shares via IPO. But where do countries / nations borrow money from? Well, when it comes to nations, there are a number of options available for them. For better understanding, let’s take a look at some sources from where countries borrow money.
Issue government bonds – This is the most common way of borrowing funds by nations across the globe. Most countries in the world offer government bonds to fund their economic activity. Government bonds are widely used by rich, poor and developing countries.
Government bonds are essentially financial instruments that promise to pay a predetermined sum after maturity of the bond. Buyers of the bonds are also paid interest. Government bonds are amongst the safest investment options. This is why they are preferred by financial institutions, insurance companies, banks, investment funds and pension funds.
Chances of default on government bonds are very less and such cases have happened only a few times in recent history. Nations cannot afford to default on government bonds because it will negatively impact their sovereign ratings. This will make it even harder for them to get new funds.
Some types of government bonds are also made available to the general public. In such cases, the bonds work quite similar to a fixed deposit. Sometimes, the central bank of the country can also buy bonds from the government.
Long term loans from IMF and World Bank – Some countries are eligible to borrow funds from international organizations such as IMF and World Bank. IMF has 190 countries as members and the organization’s primary objective is to encourage global monetary cooperation. Till date, IMF has issued loans of around USD 1 trillion. For low-income countries, IMF has special zero interest rate loan schemes.
The World Bank has similar operations, as it provides loans and grants to eligible countries. The funds are usually meant for capital projects and can be availed by low- and middle-income countries.
Borrow from other countries – In some cases, a nation can borrow funds from another country. This is usually a long-term loan with very low rate of interest. Such transactions are usually executed between friendly countries, ones that have mutual economic dependencies. Nation to nation loans are also offered to boost ties and for strategic geo-political gains.
As is evident from above, nations usually have multiple options to borrow money. That’s why it’s rare to see countries going bankrupt or defaulting on their debt payments. As long as a country’s economy keeps growing, there should be enough to repay the debts.