What are the factors contributing debt servicing problem in developing countries?
There are three types of debt service- 1) the personal sector paying back loans e,g. credit cards,mortgages etc. 2) the corporate sector servicing company borrowings 3) the Country debt i.e the debt interest the country pays on its bond issues You can look at the above 3 and see the chain in the collapse of ability to service debt. The key word is LEVERAGE- that is borrowing a lot. 1) Personal – too much borrowed to pay for inflated house prices & inflated life style based on income- many borrowing more to service existing debt. The bubble bursts,unemployment and lack of availability of further credit means debt is not serviced…. 2) Corporate-demand for goods & services collapses due to above & less operating profit to service debt. Many aquisitions etc also financed by debt- need to restructure debt service covenants becomes more difficult as Bank losses increase, Banks need to conserve capital & will not lend. 3) Country debt – UK (say) has had to pump capital into Banks-economy in
