Debt crisis occurs when a country, business or individual has more debt than their income or revenue. Individuals, businesses, and countries all experience debt crises when they miss their way to frugality and keep living on debt irrespective of their poor debt to income ratios. However, a country has a significant advantage over individuals and businesses – it can print its money (howbeit consequential).
In any economic construct, debt is used at three main levels: the Country level is captured in a nation’s fiscal policy for economic development, the corporate level is for capital injection and the individual is for personal financial support.
PUBLIC SECTOR DEBT
State revenues are most often insufficient to finance state spending, thus governments borrow to make up the difference. This is usually done through the issuance of bonds and other securities. For example, Ghana’s public debt currently stands in excess of GH¢304.6billion. Between April and June 2022, the government borrowed GH¢4.59 billion from treasury bills and other instruments to finance some projects in the 2022 budget.
The GH¢4.59 billion that government borrowed was more than the GH¢344.5 billion it borrowed in the first quarter of this year. As we speak, the republic of Ghana has turned to the IMF for a bailout programme.
CORPORATE DEBT
A company may use a number of debt instruments to finance their operations depending on their debt strategy as a Corporate. Like the state, a company may issue bonds or stocks. It may also fall on loans, some common ones being term loans and syndicated loans. A syndicated loan is granted to companies that wish to borrow more than any single lender is prepared to risk in a single loan. It is provided by a group of lenders and underwritten by a bank.
Companies also use debt in many ways to leverage the investment made in their assets, “leveraging” the return on their equity. This leverage, that is the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.
CONSUMER DEBT
For individuals, debt is a means of using anticipated income before it has been earned. Also known as ‘Personal Debt’, consumer debt is an individual financial obligation. Commonly, people use consumer debt on things too expensive to buy with the cash on hand.
Some common types of consumer debt include salary advance, credit cards, mortgages, student loans, car loans and small-scale business loans.
Individuals can also access loans informally mostly from relatives or friends. Such informal debts are usually more affordable credit. A certain amount of personal debt is necessary to afford any kind of large purchase because not many people can pay for a house or tertiary education for example with the money they have in their savings or investment accounts.
However, high amounts of personal debt can increase the strain on income by making it difficult to honour payment of bills and investment plans. If personal debt is not properly managed, it leads to bankruptcy.
One of the most common ways people fall victim to personal debt is through Credit Cards. With this accessibility, many people tend to spend more than they can afford. This is primarily because the further away an individual is from real cash, the less an individual feels the “pain of paying” and is thus likely to spend more.
THE BEST WAY TO GET OUT OF DEBT
Any sudden loss of income—or an increase in costs—can trigger debt crisis. A household debt crisis becomes active when a family starts falling behind on monthly payments. Alternatively household debt crisis can also creep up slowly through poor debt management or economic change.
For individuals, debt crisis occurs, there are only three ways to resolve it;
First, increase income through a second job (formal or informal with linear or residual income), a raise or promotion, or selling assets such as a home.
Second, cut expenses. That includes switching your taste to suite your income, using cash instead of credit, and paying extra on your debt with windfalls.
Third, accept the reality, declare bankruptcy and start all over again.
For business, debt crisis is when a company has trouble repaying its loans. Once this happens, it becomes more expensive for the company to access new credit.
The solution to a business debt crisis depends on its cause. Sometimes lenders require new management before agreeing to lower payments. If a recession has occurred, the company may need to scale back, cut costs and improve customer service. Often it can hire a turnaround consultant who can identify better business models or products.
For Countries, sovereign debt crisis occurs when a nation can no longer pay the interest on its debt. Just like a business, the nation finds that worried lenders demand greater interest payments on new debt.
Resolving sovereign debt is one of the most challenging scenarios a country faces. Poor or middle-income countries need to change the fundamental structure of their economy to reduce their dependence on debt.
Seek Help
For whichever category; Countries, Corporates or Citizenry, debt is not the answer to your problems, Debt itself is the problem. There is no such thing as good debt. If you cannot pay outrightly for your expense, then it means you cannot afford it. Do not choose debt.
