Mechanisms and Classifications of State Public Debt

Understanding Public Debt: Definition and Purpose

Public debt is a set of debt obligations or debts maintained by a state (not just the central government) against individuals or another country. Debt keeps the public sector operating, often involving intervention as traders.

The qualification of values is a way to obtain financial resources. Public debt is an instrument used by states to solve the lack of timely money.

Target Costs Financed by Public Debt

Public debt is used to finance various target costs:

• Current Expenditure: Financing public services (acquisition or lease of goods and services, and salaries to civil servants).
• Investment Expenses (Capital Expenditure): Funds allocated to maintain and expand the productive capital of the country.
• Other Expenses: Transfers and subsidies.

Real or Fictitious Debt

• Real Debt: Occurs when the Treasury issues debt securities acquired by private banks, the private sector, or abroad.
• Fictitious Debt (Untrue Debt): Occurs when the Treasury issues debt securities acquired by the country's Central Bank (Public administration).

Debt Classification by Duration (Maturity)

Debt is classified based on the duration of the loan:

• Short-Term Debt (C/T): Maturity less than 1 year. Used to cover immediate needs of the State Treasury. These are typically Treasury Bills.
• Medium-Term Debt (M/T): Funds used for financing ordinary expenses. In Spain, this is often represented by State Bonds.
• Long-Term Debt (L/T): Maturity higher than 1 year. Used to finance extraordinary expenses. In Spain, this is represented by government bonds.

Redeemable and Perpetual Debt

The state can issue Redeemable Bonds. At the time of maturity, the debt is refunded to the holder.

In contrast, Perpetual Debt has no expiration and therefore the principal is never refunded by the State. The owner is charged perpetual interests as agreed upon at the time of issue.

Internal and External Debt

It is necessary to distinguish between internal and external debt based on the nationality of the debt holder (lender).

• Internal Debt: Debt signed by national entities. Its effects are circumscribed to the scope of the domestic economy.
• External Debt: Debt signed by foreign entities. This has important implications regarding its economic aspects, both for the national economy and for those who entered into the debt.

External debt allows access to necessary funds beyond national savings. Short-term debt offers advantages but requires careful planning for repayment.

Phases of Public Debt

1. Issue: The decision to incur indebtedness, often before using funds from individuals.
2. Subscription: Offering public debt bonds to domestic or foreign entities, depending on whether the debt is internal or external.
3. Conversion: Reduction of the interest rate internally.
4. Extinction (Amortization): The debt ends when the offering stops and the economic rights occur, leading to the reimbursement of capital. This process is called amortization.

Limits and Role of Public Debt in Policy

Public debt is a key instrument of the monetary and fiscal policy of states. Through the purchase or sale of public debt securities, a state can increase or reduce the amount of money in circulation:

• Combating Inflation: If there is inflation (too much money in the market), the state may sell Public Debt (exchanging titles for money) in order to reduce the amount of money in circulation.
• Combating Deflation: If there is deflation, the state can buy Public Debt (giving money for it) to contribute more money to the market.