The Effect of Debt on a Country

by Eric Novinson - Updated September 26, 2017
Louisiana

Debt has several effects on a country. A country's debt is called sovereign debt, as the loans are taken out by the sovereign, or the authority of the country. Some of these effects are positive, some are not. The positive effects include money for new construction projects and increased sales from exporters. Negative effects require the citizens of a country to give up benefits, including land, natural resources and government services.

Economic Stimulus

Sovereign debt can serve as an economic stimulus. Expensive projects--such as borrowing money to open additional storefronts--performed by a company can provide advantages in the future. Similarly, a country may use deficit spending to fund expensive projects such as highway construction and building new power plants that provide future benefits. Deficit spending is spending more money than the state receives in a given time period.

Currency Exchange Rates

Currency exchange rates drop with additional debt. Since the country is borrowing more money, it must sell more of its bonds and there is an increased risk it can't pay them back. The country's credit rating may drop in extreme cases. The cheaper currency has an economic stimulus effect. For example, if the British pound drops in value, it helps exporters since British exports are now cheaper for customers in other countries. Imported goods prices increase, helping local manufacturers while increasing costs for other citizens. If a country is part of an economic group with a shared currency such as Greece, these effects occur across all countries in the group.

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Land Sales

Land and resource sales are one result of debt. The Louisiana Purchase was the result of U.S. President Thomas Jefferson buying land from French Emperor Napoleon Bonaparte so that Napoleon could pay off sovereign debts from his military campaigns. California Governor Arnold Schwarzenegger offered the state's possessions at an auction and sold state properties, including state fairgrounds, to reduce California's debt in 2010.

Privatization

Privatization of state enterprises is also a result of debt. In Russia, the state paid off its bills by selling state oil companies to the oligarchs. Countries in South America sold off state firms such as water companies, metal mines and fruit plantations to reduce their obligations.

Political Instability

Debt can lead to political instability. A country will generally raise taxes and reduce services when debts reach a high level. The country may not be able to afford its military or police, increasing risks of foreign invasion and crime. Debt may even topple a government, such as Iceland's did following the 2008 economic collapse, especially if a bailout of politically connected investors is the cause of sovereign debt.

About the Author

Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.

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