Debt Consolidation

Modern governments make it a point of honor to repay their debts. Debt repayment maintains and strengthens the national credit. If a national emergency arises later, it will be easy to raise funds. The repayment of loans also releases funds for trade and industry. There are some methods, which play a pivotal part in debt help. Firstly, there is utilization of surplus revenue. This is an old method and badly out of tune with the modern conditions. A budget surplus is not a common phenomenon. Even when there is a surplus, it is insignificant if it cannot be used for making any substantial reduction in the debt.

Secondly, the government may buy its own stock in the market, thus wiping off its obligation to that extent. This may be done by the application of surplus revenues, or by borrowing at low rates if the conditions are favorable. When it is intended to wipe out a permanent debt, it may be arranged to pay the creditors a certain fixed amount for a number of years. These annual payments are called annuities. It will appear that, during the time these annuities are being paid, there will be much greater strain on the government’s finances than when only interest has to be paid.

Conversion is a method for reducing the burden of the debt. A government may have borrowed when the rate of interest was high. Now, if the rate of interest falls, it can convert a high-rated loan into a low-rated one. The government gives notice to the creditors that they should either agree to reduce the interest rate for future payments, or it will exercise the option of repaying the loan. In case the bondholders do not accept the lower rate, then the government will raise a new loan at lower rate of interest and, with the proceeds, pay off the old debt. The effect is to convert a high-rated loan into a low-rated one. The financial burden is consequently reduced.

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