How Much Debt is Too Much?

• Debt is too much when:

• • Creditors (those lending the government the money) refuse to lend new money or to roll-over old bonds when they become due. Why? Because creditors (lenders) may:
  • • Lose confidence that the government will make interest and principal payments and refuse to buy new bonds.
    • Decide they no longer want to own assets (the bonds) in that currency (most likely to happen with foreign creditors)
  • Interest payments become so large that they take over the government budget, forcing cuts in human services or defense.
  • • When a national government cannot make interest payments on its debt, it “defaults”. Unlike a personal or business default, a creditor in a government default cannot “repossess collateral property” or “force bankruptcy”. The creditor either walks away from the debt, renegotiates the amount of the debt, and/or promises to never loan to that government again.