Debt Relief – Economics Revision – The Tutor Academy

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

What is Debt Relief?

Debt relief refers to the various measures that governments or international organizations can take to reduce the burden of debt for countries or individuals.

Debt relief can be provided by international organisations such as the IMF or World Bank, or it can be negotiated directly between the borrower and the creditor. The goal of debt relief is to provide financial relief to borrowers and help them address their debt obligations.

These measures can include debt forgiveness, debt restructuring, or debt rescheduling.

Debt Forgiveness

Here a creditor agrees to forgive a portion or all of the debt owed by the borrower. This is often done when the borrower is unable to pay the debt and the creditor determines that it is not feasible to recover the debt.

Debt Restructuring

Terms of the debt are renegotiated to make the debt more manageable for the borrower. This may include extending the repayment period, reducing the interest rate, or changing the currency in which the debt is denominated.

Debt Rescheduling

Delaying or spreading out debt payments, allowing the borrower to have more time to pay off the debt.

Reasons for Debt Relief

Countries – a high level of debt can be unsustainable and can lead to economic instability and difficulty in financing development projects
Individuals – high levels of debt can be overwhelming and can lead to financial distress

Advantages of Debt Relief

1. Can provide Financial Relief

It can provide much-needed financial relief for countries or individuals struggling with debt and allow them to invest in development or improve their financial situation

2. Stabilise Economies

It can help to stabilise economies and reduce the risk of debt defaults, which can have negative consequences for both the borrower and the creditor

3. Can lead to Economic Growth and Development

Debt relief can encourage economic and structural reforms, which can lead to long-term economic growth and development.

Disadvantages of Debt Relief

1. May lead to Moral Hazard

Debt relief may reduce the incentives for borrowers to manage their debt responsibly and may lead to moral hazard, where borrowers may be more likely to take on additional debt in the future knowing that it may be forgiven

2. May be perceived as ‘unfair’ to creditors

It may be perceived as unfair to creditors who have lent money in good faith and may have relied on the borrower’s ability to repay the debt

3. May discourage future borrowing

Debt relief can be controversial, with some arguing that it undermines the principle of repayment and may discourage responsible borrowing in the future

4. The effectiveness of Debt Relief depends on specific circumstances

The effectiveness of debt relief in addressing the underlying problems facing countries or individuals can depend on the specific circumstances and the measures taken to address the root causes of the debt

Quick Fire Quiz – Knowledge Check

1. Explain what is meant by ‘Debt Relief’ (4 marks)

2. Identify and explain the three types of Debt Relief (6 marks)

3. Explain two reasons for Debt Relief (4 marks)

4. Identify and explain three advantages of Debt Relief (6 marks)

5. Identify and explain four disadvantages of Debt Relief (8 marks)

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