Comments on article “ideas for reducing the debt burden” (The Economist, may 14th)

Link at The Economist original  article
http://www.economist.com/news/finance-and-economics/21698669-ideas-reducing-debt-burden-chronic-problem?fsrc=scn%2Ftw%2Fte%2Fpe%2Fed%2Fachronicproblem

Buttonwood wrote an article in The Economist last 14^th May about the high indebtedness of developed countries and the unforeseeable way to reduce it or at least limit it.

Are countries able to change the debt growing tendency? 3 tendencies seem to indicate that this is not possible in the med term: 1 the declining revenue of taxes creates a deficit in the current expenditure; 2 for those countries issuing debt in their own currency, the point of non-viability (real or perceived by bond holders) is practically non-existent, in nominal terms; and 3 the actual economic cycle still requires governmental support by continuous spending (is so necessary that some countries are thinking on the “monetary helicopter” meaning, transferring money to other economic agents, families and companies).

Then, is there a problem?

Buttonwood indicates that the risk is that, whenever is necessary to raise interest rates to control inflation, the real cost for the debtor will increase (nominally it will be still under control).

The real risk is the debt appetite of the bondholders. In theory the debt could keep growing and growing, as soon as there is a market that demands that debt at a given interest rate. When there is no longer a desire for that government debt for bondholders, a domino effect is generated, affecting not only public spending, but the constant economic stimulus of companies and families to keep the economy afloat; in consequence a fiscal adjustment will be necessary, as the ones experienced in Latin America in the 80s or as the present Greek case, not to mention the contagion that it could cause around the world.

In light of that, it seems that is not yet time to worry for developed economies, the non-viability point seems far away in an uncertainty and volatility world, where developed countries’ debt seems the “most reliable” for investors.

On the other hand, if the idea of those countries governments´ is definitely diminish the debt per se, the correct way is to deleverage all economy’s indebtedness, including families, companies and government. But as Buttonwood mentions, the consequence is recession.

Indeed, debt forgiveness and many other similar ways to “exchange” debt (for example, exchanging debt by social expending or environment conservation, that had been put on the table since the 80s) are good ideas, but so far without any progress; is complicated that debt holders of developed countries accept that deal and noting indicates that those options are viable now.

Aside to those proposals for new emissions with innovating features (GDP-Linked, Collective-Action-Clauses, etc.); to deal with the already issued debt, a set of institutional arrangements seems necessary. Different ideas have been spoken but without the sufficient global consensus to get them started; like a global debt Tribunal that helps to reconcile the interest of the debt holders and the issuers. This Tribunal would edge uncertainty for debt holders and avoid that sovereign countries reach the “non-viability point” as it was reached in the Argentinean case.

Maybe is time to discuss this kind of proposals again, after all, the consequences of a default for developed countries, could be catastrophic.