How do countries borrow money?

Mizu_Ger

With all the talk lately of national borrowing, I was thinking about where/how countries actually borrow money. Do we all borrow from one central bank (the IMF?) or do countries borrow from each other?

Either way, how can so many countries be borrowing so much, at the same time? Is there not a finite amount of money around?

(I know nothing about economics, but you probably guessed that already ).

Économiste Monétaire

Well, the IMF isn't a central bank, it doesn't issue currency. Countries generally issue bonds to capital/bond markets where people purchase them. We pay a coupon rate every designated period, and when the bond due date is up we pay the full capital amount back. We also issue short-term paper, which is borrowing on a short-term basis. It's not like Biffo walks into a bank and asks for a mortgage for Ireland. Banks sometimes purchase the debt, they were one of the biggest purchasers of our debt from the bond issuance last year. So do pension funds. That's the simplest explanation I can think of...

So many countries can issue so much debt because the return on those bonds is going up, making it relatively more attractive than equities and deposit accounts, for example. Some countries will get squeezed when the bigger countries issue more debt (i.e. Germany, Italy, U.S., et cetera).

Mizu_Ger

Thanks. That makes more sense than how I was thinking about it!