Debt burden weighs on developed nations
Friday, April 9, 2010
The debt crisis that has taken root in Greece, sparking an investor panic and talk of a national default in the heart of Europe, is at the leading edge of a problem expected to roll through the economically developed world as government borrowing rises into uncharted territory.
This mounting government debt poses a painful choice for developed countries such as Britain, Japan and the United States: either a deep reordering of public expectations about everything from the retirement age to tax rates, or slower growth as record levels of borrowing crimp economic activity.
Economists at the International Monetary Fund project that the amount of government debt held in the world's advanced economies will soon be so great that it surpasses the value of what they produce in a year.
The problem has been coming to a head in Greece, where investors Thursday dumped Greek stocks and bonds, sending the government's borrowing costs soaring and increasing the likelihood that Athens would have to request a rescue from the IMF. Cash-strapped Greece has resisted making an official request for help, fearing that an international bailout would carry with it IMF demands for even deeper austerity measures than the government has made thus far.
The situation prompted European Central Bank President Jean-Claude Trichet to reassure markets Thursday -- and in doing so to address the dramatic possibility of a government default for the first time by one of the 16 countries sharing the euro currency. "I would say that taking all the information I have, that default is not an issue for Greece," he told reporters.
Western Europe and the United States have not seen debt levels top their national output, or gross domestic product, since the years after World War II, an era when booming growth, a young population and the rebuilding of Europe gradually offset wartime borrowing.
None of those factors are at work now, as governments try to recover from a steep drop in tax revenue during the recession, a rise in spending from an economic stimulus programs, and rising pension and public health costs associated with an aging population.
The issue has moved to the top of the priority list among officials at the International Monetary Fund and in central banks and economic planning offices around the world. In the United States, where the federal government's debt has reached 84 percent of GDP, Federal Reserve Chairman Ben S. Bernanke spelled out the risks in a speech this week calling for restraint of public spending on entitlement programs.
But the same discourse is being heard across the world's mature economies, and IMF officials have begun to spell out the options -- tax hikes that might amount to as much as 3 percent of total economic output, a cap on increases in health and retirement benefits, and restrictions on spending on all other government programs.
Such aggressive changes would be politically difficult, and officials across the developed world caution that they should not begin for perhaps another year, to avoid jeopardizing the economic recovery that is taking root.
But high levels of government borrowing can drive interest rates higher, forcing businesses, households and others to pay more, curbing investment and depressing long-term economic potential.
"Unless we do something serious to fix our fiscal path -- policies that will tilt the curve downward -- you'll see these problems come forward," former IMF chief economist Michael Mussa said Thursday in a presentation at the Peterson Institute for International Economics.