By Eswar Prasad and Mengjie Ding
As the fifth anniversary of the collapse of Lehman Brothers draws near and the debate about fiscal austerity continues to rage, it is time to take stock of the trajectory of debt levels in the key advanced and emerging market economies (AEs and EMs). The overall picture of government debt around the world is not a pretty one (interactive data here).
Data from the IMF’s latest Fiscal Monitor show that the level of aggregate net government debt in the world is expected to rise from $26tn in 2008 to $42tn in 2013. The ratio of world net debt to world GDP, a more relevant indicator of sustainable debt levels, shows a corresponding increase from 46 per cent in 2008 to 61 per cent in 2013.
Anyone who has read my posts regularly will know that I am not a huge fan of calculations of the structural deficit. I have accused people who put too much weight on the numbers to be suffering from “structural deficits disease“. I have criticised the establishment of the Office for Budget Responsibility on the grounds that it would one day get into a fight with government on the (unknowable) amount of spare capacity in the economy. I have noted how weird the OBR’s initial forecast was once you looked beyond the headlines.
I would prefer to consign calculations of structural deficits to a dustbin. Unfortunately, this cannot be done because the coalition decided to place the current structural budget deficit at the heart of its fiscal policy. It promised to eliminate this deficit during this Parliament. The promise is actually a bit more complicated than that, but as far as the public were told, the deficit that mattered would be gone by the time they next came to vote.
Five interesting things arise from the Financial Times analysis of structural deficits this morning, which show the likely structural deficit to be significantly worse because the OBR’s estimate of spare capacity looks too high. If the OBR were to revise spare capacity down to levels that seem more plausible now, it would have to revise down growth rates into the medium term (and revise up deficits) because the scope for catch-up growth is much lower.
Here are my five new thoughts on the matter.
1. Are the calculations nuts? Read more
Greek debt affordability is set to worsen considerably, according to the IMF’s Global Financial Stability Report. But in a series of charts comparing 11 countries, the striking thing is how exposed indebted economies are to rising interest rates or falling GDP.
These charts (a full set toward the end of this post) are a great way to depict several moving parts to get to the nub of the issue. The basic idea is: black line inside the green area – good; black line inside redder areas – bad. Dotted line (forecast) – likewise. (The black line, incidentally, is the historical interest rate on government debt.)
The country profiles, relative to each other, are much as you’d expect. Greece, Ireland and Portugal have less favourable interest burdens (in that order). The US, incidentally, is forecast to edge into the yellow. Japan is not. Read more
The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.
In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing. The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt. Read more
Markets are showing signs of stress over Portugal following Moody’s three-notch downgrade of Greece as we approach a significant bond auction on Wednesday.
Yields on the ten-year government bond reached 7.65 per cent today – a euro lifetime high – indicating Lisbon would need to pay these sorts of levels if it tried to issue ten-year debt now. (Or Wednesday.) If it goes ahead, the auction is intended to raise €0.75-1bn. This is optimistic, however. The last two auctions raised just €1.25bn between them.
So, assuming Wednesday’s auction raises €0.75bn (optimistic), the IGCP will have raised about €2bn since the start of the year from the market in bonds. Rumour has it that the agency has about €4bn in cash. So that’s €6bn, excluding bills. So what does Lisbon’s debt management agency, the IGCP, need, and by when? The answers are sobering. Read more
The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.
The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.
Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.
On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more
Talk of a Greek debt restructuring is becoming ever harder to avoid for European policymakers. A paper just published by the respected Bruegel think-tank concludes “that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy”.
According to Bruegel’s calculations, even on optimistic assumptions the primary surplus required to reduce Greece’s debt ratio to 60 per cent of GDP in 20 years would be 8.4 per cent of GDP, rising to 14.5 per cent under a cautious scenario. As Bruegel’s economists write: “Over the last 50 years, no country in the OECD (except Norway, thanks to oil surpluses) has ever sustained a primary surplus above 6 per cent of GDP.”
Greece’s problems have been exacerbated by deep investor mistrust and its heavy reliance on overseas financing. The good news is that the situation in other eurozone “peripheral” countries is not as acute. As Bruegel also notes, the European Union establishment has also moved away from complete denial about the Greek problem. Read more
Dublin is resisting pressure to accept aid. Discussions have been taking place over the weekend, with European officials making the case for aid, and Irish officials “determined to get out of the financial difficulties [they] are in.”
Little has changed in the fundamentals of the Irish economy. Market pressures were prompted by discussions of the eurozone rescue fund a few weeks ago, in which it seemed bondholders would lose money in the case of default. Debt prices fell, and yields soared. This tempered considerably on Friday, after finance ministers from Europe’s five largest economies suggested the loss on bonds would not be retrospective and the entire thing might be voluntary. Read more