Sovereign debt

By Thomas I. Palley

The eurozone‘s public finance crisis continues to fester, reflecting both political and intellectual failure. The intellectual failure is that the crisis has been interpreted exclusively as a debt crisis when it is also a central bank design crisis resulting from the euro’s flawed architecture. The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why US and UK government bonds are weathering the storm, whereas Spain confronts default rumours despite having roughly similar debt and deficit profiles. 

By Eswar Prasad and Mengjie Ding

The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23,000bn in 2007 to an expected $34,000bn in 2010. IMF forecasts indicate the level will reach $48,000bn in 2015. The ratio of world debt to world GDP rose from 44 per cent in 2007 to 59 per cent in 2010, and is expected to climb to 65 per cent in 2015.

Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy.

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