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Public debt is the money that the state has borrowed to finance its spending and investment. When we speak of State we do not necessarily refer to the central government, but can be any level of government. Town councils, provincial councils, autonomous communities, etc.
Public debt is understood as the set of outstanding obligations maintained by the Public Sector, at a certain date, against its creditors. It is a way of obtaining financial resources from the state or any public authority and is usually materialized through issuance of securities in local or international markets and, through direct loans from entities such as multilateral agencies, governments, etc.
The State, therefore, contracts public debt to solve liquidity problems (when cash is insufficient to cover immediate payments) or to finance projects in the medium or long term.
The public debt can be contracted by the municipal, provincial or national administration. When issuing securities and placing them in domestic or foreign markets, the State promises a future payment with interest according to the terms stipulated by the bond.
The issuance of public debt, as well as the creation of money and taxes, are means that the State has to finance its activities. Public debt, however, can also be used as an instrument of economic policy, according to the strategy chosen by the authorities.
We should talk, on the one hand, of three different types of public debt, although it is true that there are different classifications. So, those are:
• Short term. Within this category are the Treasury Bills and is identified by the fact that it has a maturity that does not exceed the year.
• In the medium term. State bonds are, for their part, the highest exponents of this kind of public debt that is usually used to cope with what would be the ordinary expenses that it has.
• Long-term. As its name implies, this type of debt has a very long duration, which will be fixed properly, and may even become perpetual. In his case, it is used to deal with what would be extraordinary expenses or for special situations.
When a State incurs a public deficit because it has spent more than it has entered, it needs to find a source of third-party financing and for this purpose it issues financial assets. Most commonly, a state finances that deficit through issuance of debt securities (treasury bills, bonds or debentures).
It is possible to classify public debt in different ways. The real public debt is that made up of securities that can be acquired by individuals, private banks and the foreign sector. The fictitious public debt, on the other hand, is the issue destined to the Central Bank of the country, which is an organism of the same public administration.
The interest rate of these issues will depend on the confidence of the markets in which the State is going to return the money. Rating agencies note the probability of repayment or credit quality of these issues. There are differences between the interest rates of each country, that difference is the so-called risk premium.
In the same way, we can not forget that another of the most important classifications that exist around the public debt is the one that differentiates it into two large groups: internal and external. The first, as its name implies, only refers to the country in question and is the one acquired by the nationals of the same.
The second, the external public debt, is the one that is subscribed by foreigners and therefore affects not only the national economy but also that of those. This also implies that it brings a significant number of benefits in terms of national amortization or savings.
Usually, debt securities are seen as very reliable investment instruments, due to the high security of recovery and the yields they generate, because – except in exceptional cases – public entities fulfill their obligations. Therefore they are considered low risk. In any case, and depending on each country, the risk rating agencies qualify credit risk, which may be higher or lower, and that serves as a reference to investors in demanding greater or lesser interest.
In this way, if a person wants to recover his investment, he looks for a buyer of his bonds, which will pay him a little more than what the title cost him (although the price depends on the evolution of interest rates). This makes public debt much more attractive to investors by increasing liquidity.

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