Loans are how the nations of the world fund deficit spending. Only civilized countries and westernizing countries with the right reform can take out loans from national banks. Loans can be taken out from the budget screen at any time so long as a creditor is available, but a nation with no cash reserves and a budget deficit will automatically borrow money to fund its spending habits. (If it cannot take out a loan, spending is automatically reduced, instead.) All loans carry interest, and should a country be unable to pay them, it goes bankrupt.
The big bug
The current interest system is one massive bug as interest is NOT paid to POPs, instead interest is destroyed. If the total interest from all countries is bigger than the total money production from gold mines, the world will run out of money, destroying the economy. And even long before that, removing money from the economy, especially from struggling countries that are going to cut their spending to compensate, contributes to the notorious late game liquidity crisis.
For these reasons it makes sense to either disable loans or set interest to 0 (or to a negative value, to boost struggling countries, with the caveat of it being exploitable by the player).
Loans can be disabled by setting MAX_LOAN_CAP_FROM_BANKS and SHADOWY_FINANCIERS_MAX_LOAN_AMOUNT (in defines.lua) to 0.
Loan interest is controlled primarily by the LOAN_BASE_INTEREST value (in defines.lua, monthly value), but it cannot be set below 0.01 (the game runs with 0.001, 0.00 and even with negative values, but in-game an interest rate of 0.01 is applied). This can be circumvented via the 'loan_interest' modifier, which works as a fraction of LOAN_BASE_INTEREST that is added to LOAN_BASE_INTEREST. For example with LOAN_BASE_INTEREST at 0.02, and a 'loan_interest' modifier of -1.0, the effective interest becomes 0. With a modifier of -2.0 it becomes -0.02. With a modifier of -0.5 it gets halved to 0.01.
It is simplest to insert the desired modifier in \common\static_modifiers.txt, at the "base_values" entry, ensuring it will always be applied to all countries.
Keep in mind there are other instances of 'loan_interest' that you might want to edit or remove, such as in \common\event_modifiers.txt, \common\static_modifiers.txt and \inventions\commerce_inventions.txt. Though most of these are quite tiny and don't have a noticeable impact.
Also note that the 'loan_interest' modifier only applies to loans taken from foreign national banks and from "Private Investors"/"SHADOWY_FINANCIERS". Loans taken from a country's own national bank continue to generate LOAN_BASE_INTEREST in expenses (and continue destroying that money rather than paying it out to the POPs who deposited in the bank).
Finally, despite being referred to as a bug here, this destruction of interest appears to be an intentional feature, one of the major ways for money to be removed from circulation (others being events, decisions and positive 'import_cost' modifiers). In theory, since new money is created every in-game day via gold mines, and all regular spending by pops and governments just goes to other pops and governments, if no money is ever removed from circulation it would lead to a glut of money in the system, eventually causing most governments and pops to have more money than they can use as actual goods production can't keep up. In practice, however, there is always a shortage of money in the economy, as the overwhelming majority of it ends up locked away in the treasuries of a few rich countries and in the bank accounts of capitalists and gold miners.
POPs spend their income trying to satisfy their needs. If all their needs are met and they have money left, they store it in their country's national bank. If the POP is unable to pay for its needs later, it can withdraw money, but in the meantime the money may be lent out to sovereign nations. POPs cannot spend on credit; money lent out to a foreign country can't be withdrawn to pay for needs. The cycle is broken when a country in debt goes bankrupt.
When a government takes out a loan, it will always borrow from its own national bank before borrowing from other nations. When paying down debt, a country's national bank is the last to be paid back. Additionally, countries may sometimes borrow from "Private Investors"; these funds are created by the game to keep the global economy stable, should there not be enough wealthy countries to provide loans.
Bankruptcy occurs when a country's interest payments are higher than its income. (This means a country cannot borrow more money to fund interest payments.) Events or decisions may cause bankruptcy if they cause an indebted country to get a negative cash reserve; bankruptcy is declared immediately rather than an additional loan being taken out. A bankrupt country is displayed in red in the budget screen.
A bankrupt country loses prestige, and all countries whose national banks lent money to the bankrupt nation receive a "Repay Debts" casus belli. Should they enforce this casus belli, interest payments to the victorious countries will resume as normal. Should the country not be able to make those interest payments, the creditor receives a "Cut Down to Size" casus belli. Additionally, all spending sliders are set to the minimum and all taxation and tariff sliders are set to the maximum once bankruptcy is declared. The bankrupt country also gets a
loan_interest modifier of 0.5, making future loans carry a higher interest rate.
A bug in version 3.02 and earlier versions frequently causes bankruptcies when a saved game is loaded. This is because the goods artisans produce is not stored in the save file; upon a reload, artisans must first find something profitable to produce, which takes a few game days. Countries reliant on income taxes and tariffs from those artisans may go bankrupt for lack of revenue, even if they otherwise would not have.
Benefits and risks
The benefit of the national bank lending money to foreign countries lies in the casus belli. When a country goes bankrupt it does not pay its loan back and does not make further interest payments; if the previously paid interest doesn't equal the value of the loan, the creditor's POPs have lost money. For this reason, a creditor government can use the "Repay Debts" casus belli granted upon bankruptcy to protect its POPs' incomes. The "Cut Down to Size" casus belli directly seizes half of the bankrupt country's tax income, instead. (Though the Cut Down to Size funds are paid to the government, not POPs.)
In general, providing loans is beneficial so long as a country has the military force and the will to enforce Repay Debts casus belli against heavily indebted countries. Some amount of losses must be accepted, however: satellite states can borrow money and go bankrupt, but cannot be declared war upon. POPs deposit and loan out their money automatically, but raising income taxes or tariffs can ensure that POPs' money goes to the government treasury rather than to the national bank, if providing loans is not wanted.
Some people see a wealthy national bank as a problem, because the money is inactive while at the bank. It can go back to being active by either increasing taxes, forcing POPs to withdraw money from their bank account, or letting them lend it to governments, then a government can use the money, thus making it active again. In case of a bankruptcy the POPs effectively lose the money that was in their bank account.
Taking out loans
Much like in the real world, loans provide money in the short term while costing money in the long term, due to interest. Nevertheless, it may be useful to take out loans. For example, a country that has researched a naval technology may be interested in upgrading all its naval bases to the next level, an expensive affair. It could save up money and upgrade them as the money becomes available for each, but this may put it behind other countries in the colonization race. In this situation, it can be beneficial to take out a loan and begin upgrading every naval base at once. While the loan is being paid off, the naval bases are already being constructed.
Taking loans to finance habitual deficit spending is usually a bad idea. It can be a stopgap measure, e.g. to finance a war, but in the long run a country must maintain a budget surplus or it will inevitably go bankrupt.
The interest rate paid for all loans depends on LOAN_BASE_INTEREST (LBI) in the defines.lua file. The amount of money borrowed from the country's national bank (NBD) is important in calculating the interest. The amount of interest in £ per day (IPD) and £ per year (IPY) can be calculated by the following formulas:
- IPD = (NBD + FBD X (1 + FIM)) X (LBI+BIM)/30
- IPY = (73/6) X (NBD + FBD X (1 + FIM)) X (LBI+BIM)
- IPD = Interest Per Day (£)
- IPY = Interest Per Year (£)
- LBI = Loan Base Interest
- BIM = Base Interest Modifier (see list below)
- FIM = Foreign Interest Modifier (see list below)
- NBD = DEBT - FBD = National Bank Debt (£)
- FBD = DEBT - NBD = Foreign Bank Debt (£)
- DEBT = NBD + FBD = Total Debt (£)
When there are multiple BIMs or FIMs, the game adds them up and uses that value (see example 3). For some reason negative BIMs are bugged, BIMs don't work on old loans and a BIM can have a maximum of 3 numbers after a point, else the game will multiply the value by ten until there are 3 numbers after a point (see example 4).
|Technology||Inventions (only works outside an effect scope)|
|Issues & Reforms|
The formula may seem complicated, but the LBI is a constant, and both DEBT and NBD are easy to find in the finance tab. BIM is easy to find, just add all values from all techs together. FIM may be harder to find, as it can be used in event_modifiers.txt, inventions, static_modifiers.txt and issues.txt. It is for example used in the central bank event and the great depression event.
In vanilla there are no techs with a FIM and the inventions don't work (effect scope is used).
For an extremely large debt the formula may not be 100% accurate, but about 99.99593%, so there is almost no difference. For an more accurate result the (LBI/30) could be replaced by (LBI/30.00122105).
Here is an example of how the formula can be used.
France has £ 4000 debt. (DEBT)
Of which it borrowed £ 3000 from its national bank (NBD).
LBI = 0.02
All loan_interest modifiers (those from techs excluded) added together (FIM) = 0.05
- IPY = (73/6) X 0.02 X 4000 X (1 + 0.05 - (3000/4000) X 0.05) = £ 985,5 which is a percentage of 24.6375% interest in one year.
- IPD = (0.02/30) X 4000 X (1 + 0.05 - (3000/4000) X 0.05) = £ 2.7 which is a percentage of 0.0675% per day.
- Day 1 France has £ 4000 debt (3000 NBD).
- Day 2 France has £ 5000 debt (3000 NBD).
- Day 3 France has £ 6000 debt (3000 NBD).
On day 2 France pays £ 2.7 (see example above)
On day 3 France pays £ 3.4 (see below)
IPD = (0.02/30) X 5000 X (1 + 0.05 - (3000/5000) X 0.05) = £ 3.4
- Event modifier A gives loan_interest = 0.05
- Event modifier B gives loan_interest = -0.25
- Event modifier C gives loan_interest = 0.1
FIM = 0.05-0.25+0.1 = -0.1
loan_interest (BIM) = 0.00035
- 5 numbers after the point, so x10 gives BIM = 0.0035
- 4 numbers after the point, so x10 gives BIM = 0.035
- 3 numbers after the point, so the game can use it.