Frequently Asked Questions
Currently Used Terms
Credit Default Swap (CDS)
A default insurance issued to insure the creditor against the risk of not being able to collect all or part of the amount owed to him. In case of default, the holder of the CDS is compensated and the loss is suffered by the issuer of the CDS. The CDS are issued by banks, investment funds and other financial institutions.
The deficit or surplus of a budget results at the end of the year from the balance of state expenditure and (mainly tax) revenues. The need to prevent the financial crisis from turning into a real disaster drove most of the member states to provide huge funds in order to support their banks and their economies. This, in a time period when the tax revenues were hit by the reduction of business activities due to the crisis, finally leading to skyrocketing deficits in most of the countries.
More known as “spread”, it is the difference, denominated in base points (where 1% corresponds to 100 base points), between the interest rate on the safest bonds and the rest. In the euro zone, the spread is determined based on the interest rate of the German bonds. For example, if the German interest rate is 3.0% and the bonds of another country have a spread of 350 base points, the bonds of this country bear an interest rate of 6.5%. In any case, the differential or spread reflects how “risky” the bonds of each country are considered by investors.
The level of the interest rate on the bonds is the one determining the extent at which the tax payer shall be burdened. The higher the risk of a country not being able to repay the required loans, the higher the interest rate, and therefore the higher the amount payable by the state to its creditors each year.
It is the amount owed by the state to its creditors and it mainly results from the accumulation of budget deficits. When expenses exceed income, the state raises funds by issuing state bonds.
It is the debt owned by businesses and households. The surpluses of the countries with huge surplus are transferred to the international market which forwards it in the form of loans to those that need them. Natural customers of this kind of loans are the businesses and the households that have more needs than abilities … But this entails risks.
The countries with huge trade deficit which do not export enough to cover the cost of their imports and cover the deficit through loans from the international markets.
The global system is closed by nature and therefore the surpluses of the former reflect to the deficit of the latter, as it is not possible for all countries to have more exports than imports.
The deficit countries absorb the surpluses in the form of loans taken by the surplus countries in order to pay for their imports, similarly to the car sellers who provide a loan to their customers enabling them to purchase the car. But loans lead to debts…
The countries which huge surpluses, such as Germany, China, Japan and the most important oil producing countries. They earn more from exports than what they spent for imports. The surplus takes the form of credits circulated in the international market through the money markets.
Countries exporting goods and services of higher value than the imported goods and services present a trade surplus, whereas in the opposite case they present a trade deficit. Maintaining deficits or surpluses for a long period of time results to imbalances of the world economy.