CAUSES OF DEBT CRISIS

CAUSES OF DEBT CRISIS

WHAT DEBT CRISIS REALLY MEANS?

THE MOST BASIC DEFINITION THAT ALL AGREE ON IS THAT DEBT CRISIS IS WHEN A NATIONAL GOVERNMENT CANNOT PAY THE DEBT IT OWES ANS SEEKS. AS A RESULT,SOME FORM OF ASSISTANCE.

OTHER DEFINITIONS OF DEBT CRISIS

· A situation in which a nation borrows huge sums of money, often for infrastructure projects or for any other purposes and ends up in crisis when it cannot repay the loan or even make interest payments because of negative economic shifts.

· The heavy borrowing of many newly industrializing countries, particularly those in Latin America that resulted in a prolonged financial crisis as evidence mounted indicating that some debtor nations might not be fail to continue making payments on their loans. ...

10 MOST AFFECTED COUNTRIES IN THE WORLD:- America 9 August 2011, European Union-30 June 2010, France-30 June 2010, Germany-30 June 2010, Netherlands- 30 June 2010, Japan- 30 September 2010, Ireland- 20 August 2010, Italy- 30 June 2010, Spain- 30 June 2010, Lunemberg - 30 June 2010

CAUSES OF DEBT CRISIS

According to a survey by Moneyextra.com there are four underlying reasons for debt that stand out way beyond all the others.

At number one and king of the reason-for-debt mountain comes ‘over-commitment’. Basically, this means that people have miscalculated what they can afford and lived a lifestyle beyond their financial means. They have taken on too many financial commitments – perhaps personal loans, almost certainly credit card debt and maybe just general spending – and are now paying the price, by living a life in debt.

Nearly half of the people (42%) who responded to the survey through the Debt Free Direct Contact Centre cited over-commitment as the reason for their debt. Whether spending was reckless, or simply misguided, makes no odds now as all are in the same predicament and trying to find a light at the end of their own personal debt tunnel. Basically, this means getting sound advice, help and the ear of debt advisors who can guide them towards the right debt solutions. Accessing debt counseling should be done as fast as possible, whilst there is still the chance of rescuing the situation, even if that means cutting right back on spending until the debt is addressed. It might mean a few hard years, but a life without debt can become a reality rather than just a dream.

The second reason why people get into debt is ‘reduction of income’. 22% of people said this was the cause of their debt and this is likely to become an even bigger issue over the next year, as public sector spending cuts, revised contracts, job losses and a cutting of hours hits people who are currently just about managing their debt, but only because of the level of income being brought in right now. A reduction of income can hit an employee at any time, if there is a downswing in business, if orders or clients are lost, or if new technology reduces the need for employees to perform a certain role. Add to this a reshaping of the structure of an organization or the issuing of different job responsibilities and few of us can honestly say we are 100% certain that our income will not be adversely affected in the future.

The third most likely reason for debt – affecting more than one in ten of us (11%) – is ‘relationship breakdown’. Anyone who has been through divorce or separation will know that when things go wrong, finances immediately fall under the spotlight as the lawyers bicker over whom should have what and what payments should be made for things such as child care and maintenance and asset splits.

Another cause for large scale debt has been the corruption and embezzlement of money by the elite in developing countries (who were often placed in power by the powerful countries themselves). These moneys are often placed in foreign banks (and used to loan back to the developing countries). Many loans also come with conditions that include preferential exports etc. In effect then, more money comes out of the developing countries than is given in. This depresses wages even further due to the spiraling circle downwards to ensure that enough exports are produced.

CONCLUSION:- From the above explanation I came with a conclusion that the survey clearly shows that over-commitment, reduction in income and relationship breakdown and corruption and embezzlement are instrumental when it comes to upsetting financial security and creating debt scenarios, which is good-to-know if you aren’t currently in debt.