Debts and interest rates of credit - International Finance

Debts and interest rates for a loan

Governments strive, naturally, to keep interest rates low - this is the rule for countries with a classical market (capitalist) economy. Other things being equal, such a policy leads to a reduction in the state's interest expenses for a given amount of debt and helps to reduce the budget deficit. However, when the containment of financial expansion leads to negative real interest rates (nominal rates below inflation), it reduces or eliminates the existing debt, and then deterrence becomes the equivalent of tax-transfer from creditors (depositors) to borrowers, including the state. But this very specific tax (in the form of deterring the financial sphere) is different from taxes levying income, consumption or sales. Its rate is determined by financial regulation and inflation indicators, which are opaque in comparison with more visible fiscal measures. In view of the fact that the reduction in the budget deficit is usually associated with very unpopular cuts in spending or higher taxes, authorities seeking to reduce debt can come to the conclusion that a less noticeable tax in the form of financial restraint will be more politically acceptable to society.

The Bretton Woods system of fixed exchange rates and tightly controlled domestic and international capital markets led in the early 1980s. to a combination of very low nominal interest rates and bursts of inflation of varying intensity among countries with developed economies, giving rise to a number of problems and contradictions. The policy of deregulation, initiated by the United States, has reduced to a minimum state capacity to influence this process. But the realities of the modern situation make us use again the tried state instruments, which becomes inevitable, although it causes fierce resistance of orthodox forces in politics and business.

Real interest rates, both in advanced economies and emerging markets, have been negative for a long time-these include bills on treasury bills, central bank interest rates, deposit rates or loans, all of which have remained consistently low (on average negative) in the next three and a half decades. The mandatory upper limits on interest rates on deposits (which kept real deposit rates at a level that was even lower than negative real rates on treasury bills) forced domestic investors to hold government bonds. Such a situation existed since the early 1980s. everywhere, and since it provided bondholders with high returns, they naturally trusted their governments. Meanwhile, state debt has steadily increased, which has not been properly addressed.

For three and a half decades after the Second World War and three years after the global crisis, real interest rates, as exemplified by the rates on treasury bills of advanced economies, were on average negative. The crisis, as we see, again led to the fact that real interest rates in the advanced economies began to acquire an increasingly negative value. A general shift to lower real interest rates occurred despite the high rates demanded by investors for securities in some countries on the brink of default and restructuring (a number of eurozone countries).

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