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Compose a 2250 words essay on A Problem In the Field of Finance. Needs to be plagiarism free!She describes the major elements and features of sovereign debt crisis, its implications and impact in the
Compose a 2250 words essay on A Problem In the Field of Finance. Needs to be plagiarism free!
She describes the major elements and features of sovereign debt crisis, its implications and impact in the general sense and provides a critical case review of the US sovereign debt crisis.
Sovereign debt crisis is a situation where a countrys government is unable to pay its bills (Amadeo para 1). This occurs when the government spends more money than it has. In such a case, the government will not be able to get money from its normal funding sources. Rather, it will need to find ways and means of getting money to fulfill its payment obligation and the most common method is to borrow.
In explaining the cycle of sovereign debt crisis, Amadeo identifies that where a government enters a situation where honoring its sovereign debt is an issue, lenders see risks and begin to panic. In other words, the government cannot guarantee a low interest rate for lenders, thus, the lenders become concerned that the country cannot pay its bonds. In such a situation, the lenders will begin to demand higher yields to compensation for the speculation and anxiety that comes with the threat of sovereign debts. They therefore begin to panic and the economy gets into chaos.
One of the obvious solutions that most governments employ is quantitative easing which involves the printing of more money to ease the issues with the sovereign debt threats (Amadeo para 7). This causes inflation and affects the value of the nations currency.
Thomas Reuters provides statistical information and facts about the US Sovereign debt criss. As of October 2013, the United States governments borrowing was over $16.7 trillion (Thomson para 4). This was at par to the actual size of the US economy. Thus, as part of a trend, the Fitch rating system sought to downgrade the United States from its AAA rating to a lower rating.
Prior to the events of October 2013, notable rating agencies like Standard & Poors had downgraded the USs rating to an AA rating. This occurred in August
