Sovereign Debt Crises: It's All Greek To Me
August 9, 2010
If a government is unable to issue bonds to cover its debts, then it must resort to other means: cutting expenditures, raising taxes or borrowing from international agencies such as the International Monetary Fund. Greece and a few other European countries currently find themselves in this situation. Is the United States close to a similar debt crisis, asks Bryan J. Noeth, a Liber8 research analyst.
- Greece's government debt is exceptionally large. Its gross debt-to-gross domestic product (GDP) ratio is nearly 115 percent.
- When Greece adopted the euro as a member of the European Union, it ceded control over monetary policy to the European Central Bank and is prohibited from devaluing its currency as a means of reducing the real value of its debt (a tactic used throughout history by many countries).
- Greece is not alone; Portugal, Ireland, Italy and Spain also face excessive debt because of their high spending and accumulated borrowing.
In recent years, the U.S. government has also acquired substantial debt. Its fiscal year 2009 gross debt-to-gross GDP ratio reached 82 percent. Although U.S. debt has been increasing, it may not foreshadow a Greek-style crisis. The sharp increase in the U.S. deficit has been largely due to the recent deep recession and financial crisis. As the U.S. economy recovers, the deficit should fall as government revenues increase and recessionary spending decreases, says Noeth.
- According to the Congressional Budget Office, the U.S. deficit-to-GDP ratio was 9.9 percent in fiscal year 2009 and projected to decrease to 4.1 percent by 2012.
- In comparison, Greece had a deficit-to-GDP ratio of 13.5 percent in 2009, which is projected to be 15.4 percent by 2012.
- This projection drops to 6.5 percent if Greece implements its promised austerity measures.
Although the United States does not have the same fiscal problems as Greece, there are still issues of concern. High sovereign debt levels levy an undue burden on a country's citizens, specifically in the form of lower GDP growth and higher taxes, says Noeth.
Source: Bryan J. Noeth, "Sovereign Debt Crises: It's All Greek to Me," Liber8, August 2010.
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