Debt Bomb

A debt bomb is a situation occurring when a major financial institution, such as a multinational bank, defaults on its obligations which, in turn, causes disruption not only in the financial system of the institution's home country but also in the global financial system as a whole.

A debt bomb can also occur if consumer spending is based heavily on debt. For example, if a nation incurred huge credit card debt, individual debt holders could default en masse and create trouble for creditors. In the U.S., Washington's inability to spend less than they take in results in ever-growing borrowing by the U.S. Treasury. This scenario again can be described as a looming economic debt bomb, seeing eventually, politicians cannot kick the can down the road forever.

Perhaps what's unique about the notion of a debt bomb is no two are exactly alike. Whether an individual company, industry, or an entire nation piles debt on top of debt, eventually things collapse under their own weight. This often results in a cascading effect of systematic risk, pulling industries, regions or economies down with it. The debt burden of a single entity isn't the biggest concern; it's the contagion like effect — similar to the flu — that worries global policymakers.

In many respects, as economic growth has become more integrated through globalization, the negative effects of debt bombs can have new and unparalleled consequences for international partners. For instance, since the unwinding of international markets brought on by the housing crisis in the United States in 2009, the country of Greece's overwhelming national debts have troubled its European Union counterparts. Even today, Greece struggles to get its fiscal house in order, which continues to weigh on other European Union member countries.