Monday, May 17, 2010

Global Debt Crisis

The IMF have published a detailed look at government borrowing figures, which has become one of the hottest topics in economics at the moment. (17mb pdf from IMF)

There are serious concerns that governments are exceeding their ability to repay debts.

The problem with government debt is that is immensely complicated. For example, why do markets take fright at Spanish debt (59% of GDP) but leave Japan at (195% of GDP) well alone? (list national debt by country)

Firstly, you have to be careful understanding all the different ways of measuring government debt. There are a bewildering array of different measures - see: Understanding Government debt statistics.

Summary of Global Debt Crisis
  • Government Borrowing has shot up sharply around the world during the financial crisis and recession.
  • This cyclical borrowing has highlighted long term structural debt issues. This is particularly problematic for countries with ageing populations, and rising pension and health care insurance.
  • There is a risk rising debt burdens may cause investors to become unwilling to hold government bonds because of the risk of default. This scenario would cause widespread financial freezing. However, some countries with largest debt levels, still can borrow at relatively low interest rates, indicating markets still trust government borrowing.
  • Countries in the Eurozone are more fragile to debt problems because they lack an independent monetary policy and ability to devalue exchange rate.
  • The level of debt is not the only factor in determining whether it is a real problem. It is just as important to consider
Debt Maturity Levels
  1. Debt Maturity Levels. This shows how much countries need to borrow in the short term. E.g. UK has longest debt maturity ratios and so has to borrow correspondingly little in short term compared to US. The US has a gross financing need of 32% of GDP. The UK is 20%, Japan is 64% of GDP.
  2. Prospects for Growth. The rate of positive Real economic growth is vital for determining the prospects of debt to GDP. High growth reduces debt / GDP ratio without reducing primary budget. But, high growth automatically improves tax receipts and lowers spending. Countries with poor growth prospects (e.g. Greece tied to Eurozone monetary framework) will struggle to escape debt trap.
Different Takes on IMF Report
  • Paul Krugman highlights the fact the majority of debt growth is due to temporary cyclical factors. He argues the debt was a necessary consequence of staving off a deeper recession. MIS IMF
  • The Telegraph have a thoughtful look at why the US actually faces a bigger burden than many EU countries, and yet may still have sufficient flexibility to survive. - US Faces biggest fiscal crunch
With a highly detailed 17mb report it is inevitable that it will be open to many different interpretations. But, one thing is for sure, the problem of government debt is not going to go away. It has the potential to be a serious crisis if there is a combination of a global slowdown which makes debt reduction very painful. It already is a very real problem for Greece


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