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Financing of government budget deficits by foreign sources

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Suppose that government budget deficits are financed to a considerable extent by foreign sources. How does this create a potential burden for the domestic economy in the future?

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The solution discusses how financing of government budget deficits by foreign sources creates a potential burden for the domestic economy in the future.

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Debts created by borrowing must be serviced at some point in the future and thus represent a burden on future generations. Foreign borrowing can lead to a debt crisis if resources are not used productively. A debt crisis occurs when a country repudiates or defaults on its debts. The problem is more in the case of foreign debt than domestic debt. This is because governments can always print more money to pay off domestic debt, which they cannot do for ...

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