Debt crisis

From a debt crisis is spoken when a debtor resulting from its debt capital services either temporarily (liquidity crisis, moratorium ) or permanently ( solvency crisis ) can no longer meet.

General

Lenders have an interest to measure their credit risk by the debtor. Therefore, a multitude of school thinking numbers. These are important control and decision variables for the debt - deployment or leaving. While the interest burden ratio only takes into account the interest expense of a borrower, the debt service coverage ratio includes additionally the repayments to be made. Interest expense and amortization together constitute the debt or debt service. As regards interest, all interest expenses resulting from interest-bearing liabilities include (except interest on pension provisions, bank charges ). The debt service coverage ratio indicates the extent to which applied for loans and interest repayments can be paid by the debtor of its revenue.

Debtors who can get into a debt crisis, natural persons, companies or states (or their political subdivisions ). They all share in the debt crisis that they have the interest and principal payments rates - combined for debt service - in whole or in part, may not apply. This can have two main causes. On the one hand, debt may already be so high that the resulting debt service by structural declines in revenue can not be met, on the other hand, cyclical revenue declines may subsequently arise. In both cases, the debt service limit is exceeded. Debts were usually added to the assumption that they remain affordable for the same economic or even economic growth. Since the financial crisis starting in 2007, the term debt crisis was concentrated to States as a debtor, shall continue to apply for all types of borrowers.

Can be exacerbated by the location of a debtor by an exponentially anwachsendes problem of interest, on the one hand caused by rising interest rates due to declining credit quality and the other by compound interest effects.

Indicators

There are financial ratios, which indicate whether at a particular debtor there is a debt crisis or not. The debt crisis itself has no such code, but merely referred to the economic condition of the debtor. The debt ratio, interest coverage, debt service coverage ratio and the debt service limit are school thinking numbers, from which a debt crisis can be read. Debt service can (sale of assets), increase in equity or debt be disputed in a debt crisis only by asset degradation. However, these are not the natural sources for debt service, but only the estimated recoverable cash surpluses.

Follow

From the discussed causes shows that debt may only be as high dimensioned such that the resulting debt service from them and can still be performed in a cyclical or structural crisis. The resulting debt service limit is calculated to be derived differently for the different types of borrowers. A state is in a debt crisis when he his foreign liabilities no longer contractually recoverable revenue from sustainably can use (such as export revenues, interest income) and may need to rescheduling. The debt service coverage is reached companies, if the debt service from operating cash surplus can just be denied. In this limiting case, the debt crisis begins as an integral part of a corporate crisis. Individuals fall into a debt crisis if their current income ( from salary / wages, pensions) are no longer sufficient to pay interest and repay principal herewith for borrowing.

Depending on the economic status of the debt crisis and the degree of third-party support, the debt crisis of over-indebtedness, bankruptcy or insolvency state can expand. A debt crisis can in states also lead to hyperinflation and currency reforms or the formal declaration of bankruptcy ( Argentine crisis ). Debt crises are more common in developing countries, mostly triggered by current account deficits, but can also affect industrialized countries, such as the Japan crisis has shown.

Distinction between

The term debt is to be distinguished from the legal concept of fault; term often used is the fault of crisis incorrect - instead of debt crisis - hence the is.

See also

• Public debt
• Budget balance
• EU convergence criteria