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 14th May about the high indebtedness of developed countries and the unforeseeable way to reduce it or at least limit it.
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 14th 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.
