Why Every Country Is in Debt? And Who Do They Owe?

Hey there! Ever seen the news say the government  is blowing billions on something ridiculous, while the country is drowning in debt?  People got furious and panicked.

But, do you know that almost every country on Earth  has debt. India, Germany, Switzerland, Qatar. You name it.

Even big, rich nations aren’t safe  from debt. Japan owes twice its entire economy, and the U. S.

? A cool $36 trillion debt and  still counting. Sounds crazy, right?

So, have you ever wondered why are countries in debt?  Why don’t they just print unlimited money? Is debt really that bad?

And if countries owe money,  who are they borrowing from? And can a country be debt free? So, in this video, we’ll talk all  you need to know about debt, let’s get started!

Section 1. What is National Debt? If we mention  a country’s debt, we call it as “national debt.

” National debt, also called public debt, government  debt, or sovereign debt, is the total money a federal or central government owes. Just like  people take out loans when they need money, governments borrow when they spend more than they  earn. But instead of borrowing from a single bank, countries get loans from various sources like  other nations, big financial institutions, and even their own citizens.

National debt only  includes federal or central government debt. So, U. S.

national debt only includes U. S. Federal  Government’s debt but it doesn’t include local or state debt, like California or Texas’ debts. 

Yeah, states or provinces can take debts for their own which is different from federal or  central government debt. National debt also doesn’t include American citizens’ personal debt  like credit cards, student loan, or mortgages. So, now you’ve understood what national debt is.

Your  next question is, why do countries borrow in the first place? We’ll cover that in the next section. Section 2.

Why do countries borrow money? Why do governments need to borrow money when they can  just print more money? Well, when the governments print money mindlessly, they think they have  unlimited money and will spend recklessly, flooding the economy with cash.

This will  cause hyperinflation, make prices skyrocket, and crash the economy. As a result, investors and  foreign countries will lose trust and think of the money as worthless as toilet paper. This already  happened in Venezuela and Zimbabwe.

Borrowing, however, keeps them disciplined as debt comes  with interest, this forces government to manage their money more responsibly as they need to  repay the debt. If you want more explanation, check out my other video, “Why don’t we just print  more money? ”, link in the description.

Now, let’s look at why governments borrow in the first place. The first reason is to cover budget deficits. A government’s main income comes from taxes, but  sometimes it’s not enough to cover expenses.

This is called a “budget deficit. ” For example, if the  government collects $3 trillion in taxes but needs $4 trillion to fund education, healthcare, and  public services. That leaves a $1 trillion gap.

So, what are the options? Cutting spending?  That means fewer services, worse education, and underfunded healthcare.

People won’t be happy  and will probably protest the next day. Raising taxes? That makes life harder for everyone  and might lead to even bigger protests.

So, the easiest solution is borrowing money  to cover the deficit. And we haven’t talked about the government corruption. Second reason is to invest in growth.

Borrowing isn’t always a bad thing. Imagine your  country needs roads, schools, and hospitals, but the government has no money and refuses to  borrow. Instead of building them now, they would have to wait years to save up.

In the meantime,  people struggle with bad roads, lack of schools, and poor healthcare. But if the government  borrows, they can build these things now, helping people sooner and improving the economy faster.  These investments can help grow the economy, which in turn increases tax revenue and eventually  make it easier to pay off the debt later.

Third reason is to handle crises and emergencies.  Sometimes, governments have no choice but to borrow. When unexpected events like wars,  crises, natural disasters, or pandemics happen, they need to act fast.

For example, in 2020  alone, the U. S. borrowed $3.

8 trillion which is about 18% of its GDP, for COVID-19 relief,  stimulus checks, and business aid. Without this, the economy could have been worse, and many  more people would have lost their jobs. Fourth reason is to pay off existing debt.

You’re  not the only one who takes loans to pay off old loans, the governments have mastered this trick  better than you. So, let’s say a country borrowed money in 2010 with a repayment deadline in  2020. But when 2020 arrives, it can’t afford to pay it back.

What does it do? Of course, take  another loan in 2020 to repay the 2010 debt, and this cycle will keep going. As long as the country  manages its debt responsibly, it’s not necessarily a problem.

But if debt spirals out of control?  Well, that’s exactly what happened to Sri Lanka, which defaulted on its $51 billion external debt  in 2022, leading to mass protests and chaos. Fifth, to control interest rates and inflation. 

Sometimes, governments borrow money as a financial tool, not just because they’re short on cash.  By issuing bonds, they can control inflation, stabilize their currency, and influence interest  rates. For example, when inflation is too high, governments can issue bonds to pull money out  of the economy, reducing inflation.

On the other hand, when the economy is too slow, governments  can borrow more to inject more money into the economy and stimulate growth. Of course, it’s  not that simple, but that’s the simplest logic. Now that we know why countries borrow money, the  next question is who is actually lending them all this money?

Let’s find out in the next section. Section 3. Who lends money to countries?

You realize that governments often take on  billions, sometimes trillions of dollars, in debt. And you might be wondering which bank has  trillion dollars of money? Well, the government doesn’t just borrow from one source, they borrow  that money from 3 main sources which are domestic, foreign, and central bank.

Let’s break it down. First is from domestic lenders. If you don’t know, you can lend your money to your own country! 

This is called bonds. So, when you buy bonds and treasuries, you are lending your money to the  government and the government will repay you the money back plus interest. So, local citizens like  American citizens can buy U.

S. Treasury bonds, and not only people, local U. S.

commercial banks like  Bank of America, can also buy U. S. bonds.

Some ETF and mutual funds even some companies also buy  bonds as their investments too. Not only private investors, even government agencies can buy bonds  too, this is called intragovernmental debt. So, government agencies like social security in the  U.

S. can use their extra money to buy government bonds in order to get the interest. So, they can  get more funds to provide more benefits.

In fact, in March 2025, about $7. 3 trillion or 20% of  U. S.

national debt is intragovernmental debt. Now, the second is from foreign lenders. Not  only from locals, even foreign citizens and commercial banks can buy bonds, just like locals. 

For example, German citizens or German commercial banks can also buy U. S. Treasury bonds.

Foreign  governments also buy other countries bonds, but usually from stable economies mostly as  investment tools to get the interest profits, like Japan and China being the largest holders of U. S.  Treasury bonds, each owning around $700 billion and $1 trillion.

Now, what if the country's  economy isn't strong? Most foreign governments won’t buy its bonds because they don’t fully  trust that weaker economies can pay them back. If a country defaults on its bonds, investors  lose money, and there’s no easy way to get it back.

Instead, they prefer direct loans, where  they can require certain policies, and guarantee if the weaker economies can’t pay it back. When countries need long-term funding for infrastructure projects, they borrow from  organizations like the World Bank or the Asian Development Bank (ADB) and more, which provide  direct loans for roads, schools, energy projects, and other developments. These loans have lower  interest rates but come with strict conditions.

Now, what if a country is in economic chaos,  broke, and no one else will lend to them. Well, they turn to the IMF or International Monetary  Fund, the last choice. Unlike development banks, the IMF doesn’t fund projects but  provides emergency loans to prevent financial collapse.

IMF loans come with  lower interest BUT with strict conditions, such as requiring the country to increase taxes,  cut spending, and privatize state-owned companies, which can lead to protests and worsening economic  conditions. Greece, Argentina, and Indonesia became worse after following IMF’s requirements. Third is from its own central bank.

Governments can, in theory, borrow from their own central  banks. This is called debt monetization or monetary financing, where the central bank prints  new money and use it to buy government bonds, but since it involves bonds, it also comes with  interest. However, most countries don’t do this anymore because it can cause currency  devaluation and hyperinflation.

Instead, central banks can still buy government bonds,  but they do it indirectly, by purchasing them from commercial banks that bought them first.  This is mostly done to control interest rates and inflation not to really lend money to  the government, which I explain more in my inflation video (yeah, link in the description). Now that we know why countries borrow money and who lends to them.

Now, we go to the next section! Section 4. Is National Debt a bad thing?

Well, not really. Because debt can be good  or bad, depending on how it’s used and whether a country can manage it properly. Debt can be beneficial if used and managed wisely.

As I mentioned, when governments borrow to  build infrastructure and public services, which can boost the economy. In  times of crisis, like COVID-19, borrowing helps stabilize the economy and support  businesses. So, as long as the debt is manageable, it’s good.

But too much debt is also dangerous. If  a country keeps borrowing just to repay old debt, they fall into a debt trap. When debt grows too  large, a country spends more on interest than essential services like healthcare and education. 

If investors lose confidence, they doubt whether the country can repay its debt, which lowers its  credit rating. Yeah, countries also have credit ratings, just like your credit score at the bank.  A bad rating makes borrowing harder, so investors stop lending or demand higher interest rates,  leading to a debt crisis and possible default, which means the country gives up on paying its  debt, like Sri Lanka in 2022.

A country defaulting is different from a business going bankrupt, so  if you want a full video on what happens when a country defaults, let me know in the comments! Now, how much debt is too much? There’s no exact number, but one way to measure it is the  debt-to-GDP ratio, comparing a country’s total debt to the size of its economy or GDP.

So, for  example, let’s say a country has a 60% debt-to-GDP ratio, it means if that country has $100 billion  GDP, then its debt is around $60 billion. Many economists consider 60% or lower a safe level, but  it’s not a strict rule. Some countries, like the United States, have a debt ceiling which is a law  that sets a limit on how much debt the government can take on.

If the debt hits this limit, the  government can’t borrow any more in order to make U. S. more responsible managing its debt,  but this is quite useless because the U.

S. just raises the ceiling every time to avoid default. Now that we know when national debt is good or bad, now your next question might be,  can a country be 100% debt free?

Well, let’s find it out in the next section. Section 5. Can a country be debt free?

Technically, yes. But in reality, almost no  country is completely debt-free, and for most economies, being debt-free isn’t even a good  idea. So, is there a country with zero debt?

The answer is none. Every country in the world has  some level of debt. The closest example of being debt-free is Macau, BUT Macau is not a country. 

It’s a Special Administrative Region of China, so it doesn’t count as a sovereign nation. Macau  can afford to be debt-free because it’s tiny, with just around 700,000 people and an area about half  the size of Manhattan. Also, Macau earns billions from casinos, even more than Las Vegas casinos. 

And of course, we can’t just turn the entire U. S. into one giant Las Vegas to pay off the debt.

But even if a country could be debt-free, most don’t even try. As I said before, if a country can  manage its debt properly, debt can be beneficial for the country. Completely eliminating debt would  mean massive spending cuts or huge tax increases, both of which could slow down economic growth  and trigger massive protests.

No government debt also means no government bonds, which would  remove a critical safe investment option. Most pension funds rely on government bonds as  a low-risk way to grow money for retirement. Without bonds, pensions would be forced to  invest in riskier assets, making retirements less secure and financial markets more volatile.

So, in conclusion. Debt is actually a double-edged sword. Used wisely, it can help a country grow and  thrive.

Used recklessly, it can lead to economic disaster. So next time you hear someone ask, “Why  does our country have debt? ” then you already knew the answer.

It’s not about having debt, it’s about  knowing how to manage it. And also, maybe you’re still wondering why some countries handle high  debt just fine while others collapse, and other things about debt. Maybe that’s for another  video because we’re out of time.

If you want me to make other videos explaining these topics,  please like and subscribe. Thanks for watching.