Public debt is that contracted by the State with other countries or with individuals.
Public debt is the set of debts that a State maintains against another country or individuals. It is a mechanism to obtain financial resources through the issuance of securities .
From the Latin debĭta , 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 entire society or that is common to the people .
The State, therefore, contracts public debt to solve liquidity problems (when the cash on hand is not enough to face immediate payments) or to finance medium or long-term projects .
How public debt is contracted
Public debt can be contracted by the municipal, provincial or national administration. By issuing securities and placing them in 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, like 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.
Public debt can be classified in different ways.
Classification according to type
We would have to talk, 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:
- In the short term. Within this category are treasury bills and they are identified by the fact that they have a maturity period that does not exceed one year.
- In the medium term. State bonds are, for their part, the maximum exponents of this type of public debt that is usually used to meet what would be the ordinary expenses that the state has.
- In the long term. As its name indicates, this type of debt has a very long duration, which will be set appropriately, and which may even be perpetual. In your case, it is used to cover what would be extraordinary expenses or for special situations.
In any case, it is possible to classify public debt in different ways. Real public debt is that made up of securities that can be acquired by individuals, private banks and the foreign sector. The fictitious public debt , on the other hand, is the issue destined for the Central Bank of the country, which is an organization of the same public administration .
In the same way, we cannot forget that another of the most important classifications that exist regarding 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 what its nationals acquire.
The second, the external public debt, is the one that is subscribed by foreigners and affects, therefore, not only the national economy but also that of them. This also means that it brings with it a significant number of benefits in terms of amortization or national savings.