Public Debt Explanations

From the Latin debt, debt is the obligation that a subject has to repay, satisfy or pay, especially money. Public, on the other hand, is an adjective that refers to that which belongs to the whole society or that is common to the people.

The notion of public debt refers to the set of debts that the State maintains against another country or individuals. It is a mechanism to obtain financial resources through the issuance of securities. See Abbreviation Finder for acronyms related to public debt.

The State, therefore, contracts public debt to solve liquidity problems (when the cash is not enough to meet immediate payments) or to finance medium or long-term projects.

Public debt can be contracted by the municipal, provincial or national administration. By issuing securities and placing them in the national or foreign markets, the State promises a future payment with interest according to the terms stipulated by the bond.

The issuance of public debt, as well as the creation of money and taxes, are means that the State has to finance its activities. Public debt, however, can also be used as an instrument of economic policy, according to the strategy chosen by the authorities.

We would have to speak, on the one hand, of three different types of public debt, although it is true that there are different classifications. So, those are the following:

  • Short term. Within this category are the Treasury Bills and they are identified by the fact that they have a maturity term that does not exceed one year.
  • In the medium term. The State bonds are, for their part, the maximum exponents of this kind of public debt that is usually used to deal with what would be the ordinary expenses that the former has.
  • Long-term. As its name suggests, this type of debt has a very long duration, which will be set conveniently, and can even be perpetual. In his case, he is used to face what would be extraordinary expenses or for special situations.

Public debt can be classified in different ways. The real public debt is that made up of the titles that can be acquired by individuals, private banks and the foreign sector. The fictitious public debt, on the other hand, is the issue destined to the Central Bank of the country, which is an organism of the same public administration.

In the same way, we cannot forget that another of the most important classifications that exist around public debt is the one that differentiates it into two large groups: internal and external. The first, as its name indicates, only refers to the country in question and is the one acquired by its nationals.

The second, the external public debt, is the one subscribed by foreigners and therefore affects not only the national economy but also theirs. This also means that it brings with it a significant number of benefits in terms of amortization or national savings.

public debt