Over the past months , and even years , the media inundate us with economic and financial terms that almost none of us knew , but there is one in particular that has taken a leading role unmatched and usually when both these media as politicians and economists pronounce it is to refer to something bad that has happened in the economy and finance. We are referring to the much- reviled financial markets.
As we say , it seems that markets are making our day to day , to the point of having to take measures to cut public spending by “blame ” them. But , do you really want that countries crumble to achieve personal gain ?
Market can be defined as any place or mechanism to facilitate the exchange of assets. In all , there are two economic agents that interact with each other . On one side is the bidder ‘s product or service you are looking for the maximum benefit you can get from the sale of a product or service , taking into account what the buyer offers for the same . This is what is called the balance between supply and demand. A clear example of this is the commodity market .
As we have said in previous posts in this blog , the states are financed by taxes and by debt. Public debt through bond issues in financial markets , where investors flock to access it. That is, in this case the exchange of capital assets shall pay the investor , and the investor would be debt contracts with the state, waiting for him to return the amount along with interest . And , as we have said , are also affected by the balance between supply and demand, this means that investors will demand higher returns higher perceived risk that they will not return the amount they invested .
And this is where it takes a special role in the risk premium . This balance between supply and demand makes the risk premium goes up or down , negatively or positively affect the country. Investors may perceive such a risk in the economy of a country that is not sustained at the same pay debts ( economic analysts say from a 7% interest the country could declare bankruptcy , so canceling all promises to pay ) . This is what has happened to Greece , Ireland and Portugal , which have had to be rescued , or more recently, what is happening with Italy , which is facing serious problems .
Without going to that extreme, to assure investors that states can meet the payment commitments , and thus reduce its bond yields , and hence risk, are required to undertake a series of measures to reduce public spending or increased revenue through taxes , or a combination of both without the two are so drastic . The problem is that states are cutting spending items for social services such as health , education and unemployment , without raising taxes .
And here is where it comes from the famous phrase : “the markets we are imposing cuts in public spending .” Not to say that there is a person acting on behalf of them, but rather a group of institutional investors will not buy the sovereign debt of a country as long as do not have some assurance that they will return , and States therefore may not adequately funded .
How to avoid this exposure to the markets?
Logically, the debt is a state , the greater chance you will not able to meet its payment obligations with its current funds , and of course, have to undertake actions to reduce spending or increase revenues . That is, the more funding comes from the side of the public debt , increased risk of market exposure .
Therefore, there would be several options to avoid this, we have already discussed . On one hand, if we maintain the same costs and public benefits now , there is no choice but to raise revenue through taxes or increase resources to fight tax evasion, a drag in any country today . This already happens in countries with high tax burden in Europe like Sweden , Denmark , Norway … which have not been punished by the financial markets , even some of them belonging to the European Union . The other option would reduce costs, but this is already happening in most countries in trouble.
In conclusion , the more we have to fund our state by way of public debt , we will be more sensitive to the problems of the debt crisis, such as ours, which is so strongly azotandode countries .