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What is the cause of debt crisis in a country?


BY: Pankaj Bansal, Founder at NewsPatrolling.com

A debt crisis in a country occurs when the government is unable to meet its debt obligations, leading to financial instability. Several factors contribute to a debt crisis:

  1. Excessive Borrowing:
  • Governments may borrow heavily to finance large projects, welfare programs, or to cover budget deficits. Over time, this can lead to unsustainable debt levels.
  1. Economic Recession:
  • An economic downturn reduces tax revenues while increasing the need for public spending, making it difficult for a government to service its debts.
  1. High Interest Rates:
  • Rising interest rates increase the cost of borrowing, making it harder for a country to pay back existing debt.
  1. Currency Depreciation:
  • A decline in the value of a country’s currency can make debt denominated in foreign currencies more expensive to repay.
  1. Structural Weaknesses:
  • Weak financial institutions, poor fiscal management, and lack of transparency can lead to inefficient debt management and increased vulnerability.
  1. Political Instability:
  • Political unrest or unstable governments can deter investment and reduce economic growth, worsening a country’s ability to manage debt.
  1. External Shocks:
  • Events such as global financial crises, natural disasters, or commodity price shocks can reduce a country’s income and increase borrowing needs.
  1. Poor Fiscal Discipline:
  • Chronic fiscal deficits and failure to implement necessary economic reforms can result in debt accumulation over time.
  1. Debt Servicing Burden:
  • A high proportion of government revenues dedicated to interest payments can crowd out spending on essential services and investments.
  1. Lack of Access to Credit Markets:
  • When investors lose confidence, countries may face difficulty refinancing their debt or raising new funds.

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