Debt

DEBT IS AN AMOUNT of money that is owed, measured in a single snapshot of time, as a result of previous borrowing. Debt is a stock concept, as opposed to flow concepts in economics, which are expressed over certain periods of time. Debt represents accumulation of deficits between monetary receipts and payments—flows measured monthly, quarterly, or annually. There are several different types of debt: external (foreign) debt; public (national, domestic, or government) debt; and private (corporate and household) debt.

External debt arises through accumulation of deficits between a country's receipts and payments with the rest of the world. It is usually a result of persisting trade deficits. Public debt represents accumulated budget deficits, measured as a difference between the government's tax revenues and its expenditures. It is usually a result of persisting budget deficits. The accumulated negative difference between the income and expenses of corporations and households gives rise to private debt.

Debt redistributes purchasing power between a debtor (borrower) and a creditor (lender), where the debtor is an entity that increases current consumption against consumption at future times, when the debt needs to be repaid to the creditor. The repayment of the debt includes a part of principal and an interest over the agreedupon period of time. The interest rate is negotiated between the lender and borrower and includes the assessment of a market-free interest rate as well as risk characteristics, for example the creditworthiness of the borrower.

The ability to repay the debt, sometimes referred to as the debt burden, depends on the ability of the borrower to generate sufficient revenues in the future that would repay principal and interest without comprising too heavily already reached levels of consumption at the times of repayment. Solvency and liquidity of the debtor are instrumental in measuring the ability of repayment. Debt can be restructured or cancelled. Debt restructuring involves renegotiation between the debtor and creditor of the terms and maturity of the debt payments. Debt cancellation is the forgiveness of a certain portion or of the entire debt by the creditor.

Some analysts and economists believe that the international external debt of many developing and poor countries has become disproportional to their ability to repay. Debt restructuring and debt cancellation are at the center of initiatives to define and ease the debt burden of heavily indebted poor countries.