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Political Economy

Thursday, September 2, 2010; A15

Will the U.S. government ever default?

It's not a pleasant thought for anyone holding some of the roughly $9 trillion in U.S. government bonds and notes - or for anyone hoping that the global economy stays on an even keel.

But the economists at the International Monetary Fund are paid to ponder the improbable, and in papers published Wednesday, IMF staff members examined where the United States and other developed countries fit on a continuum between easy living and disaster.

Using a concept known as "fiscal space" - how much latitude a country has to borrow before the markets shut off the spigot by demanding unsustainable interest rates - the IMF drew a bright red line through five nations running out of room: Greece, Iceland, Italy, Japan and Portugal. Of the 23 developed nations it analyzed, four others, including the United States, received a yellow caution flag.

In the case of the United States, the fund said the odds are roughly three out of four that the country could increase its total debt to some degree without being penalized by investors - logical, considering that the debt is steadily increasing and interest rates remain low. However, that probability would fall to 50-50 if the new borrowing exceeded 50 percent of GDP - or about $7 trillion.

That might seem like plenty, except that under Office of Management and Budget projections, the fiscal space may fast disappear. The OMB projects total U.S. debt to jump by about $4.7 trillion in the next five years, leaving little room. Better-than-expected growth could add space, but another recession could shrink it.

- Howard Schneider

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