Friday, March 02, 2012
[IWS] CRS: SOVEREIGN DEBT IN ADVANCED ECONOMIES: OVERVIEW AND ISSUES FOR CONGRESS [29 February 2012]
IWS Documented News Service
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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
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Congressional Research Service (CRS)
Sovereign Debt in Advanced Economies: Overview and Issues for Congress
Rebecca M. Nelson, Analyst in International Trade and Finance
February 29, 2012
http://www.fas.org/sgp/crs/misc/R41838.pdf
[full-text, 38 pages]
Summary
Sovereign debt, also called public debt or government debt, refers to debt incurred by
governments. Since the global financial crisis of 2008-2009, public debt in advanced economies
has increased substantially. A number of factors related to the financial crisis have fueled the
increase, including fiscal stimulus packages, the nationalization of private-sector debt, and lower
tax revenue. Even if economic growth reverses some of these trends, such as by boosting tax
receipts and reducing spending on government programs, aging populations in advanced
economies are expected to strain government debt levels in coming years.
High levels of debt in advanced economies are a new global concern. High public debt levels
have become unsustainable in three Eurozone countries: Greece, Ireland, and Portugal. These
countries turned to the International Monetary Fund (IMF) and other European governments for
financial assistance in order to avoid defaulting on their loans. Japan’s credit rating was
downgraded by Standard and Poor’s (S&P) in January 2011 over concerns about debt levels, and
its rating was put on a negative outlook in April 2011. In August 2011, S&P downgraded longterm
U.S. government debt from AAA (the highest possible rating) to AA+.
To date, many advanced-economy governments have embarked on fiscal austerity programs (such
as cutting spending or increasing taxes) to address historically high levels of debt. This policy
response has been criticized by some economists as possibly undermining a weak recovery from
the global financial crisis. Others argue that the austerity plans do not go far enough, and that
more reforms are necessary to bring debt levels, especially with aging populations in many
countries.
Issues for Congress
• Is the United States headed for a Eurozone-style debt crisis? Some economists and
Members of Congress fear that, given historically high levels of U.S. public debt, the
United States is headed towards a debt crisis similar to those experienced by some
Eurozone countries. Others argue that important differences between the United States
and Eurozone economies, such as growth rates, borrowing rates, and type of exchange
rate (floating or fixed), put the United States in a stronger position. The United States has
a long historical record of debt repayment, and bond spreads indicate that investors
currently view the United States as far less risky than Greece, Ireland, or Portugal.
• Impact on U.S. economy. How other advanced economies address their debt levels has
implications for the U.S. economy. Currently, most advanced economies are focused on
austerity programs to lower debt levels. This could slow growth in advanced economies
and, because they are among the United States’ main trading partners, depress demand for
U.S. exports. If advanced economies shift to restructuring debt, U.S. creditors exposed
overseas could face losses on their investments. As of September 2011, direct U.S. bank
exposure to Greece, Ireland, and Portugal (to governments and the private sector) was
$55 billion, less than 2% of total direct U.S. bank exposure overseas. However, U.S.
banks and other financial institutions may have other potential exposures that could
increase the effects of a financial crisis in the Eurozone.
Policy options for Congress. Congress is debating proposals to reduce federal debt levels in the
United States. Congress could urge the Administration to coordinate fiscal policies multilaterally
to avoid simultaneous austerity measures that undermine the economic recovery.
Contents
Introduction...................................................................................................................................... 1
Background Definitions and Concepts ............................................................................................ 3
Why and How Governments Borrow........................................................................................ 3
How Sovereign Debt Differs from Private Debt ....................................................................... 4
Why Governments Repay Debt, and Why They Default .......................................................... 5
Measuring Sovereign Debt ........................................................................................................ 6
Trends in Sovereign Debt ................................................................................................................ 7
Pre-Crisis: Vulnerabilities in Emerging Markets....................................................................... 7
Post-Crisis: Rising Debt Levels in Advanced Economies......................................................... 8
Variation Among Advanced Economies .................................................................................... 9
Longer-Term Pressures in Advanced Economies .................................................................... 11
Challenges Posed by High Levels of Debt .............................................................................. 12
Addressing High Debt Levels........................................................................................................ 13
Policy Options ......................................................................................................................... 13
Fiscal Consolidation.......................................................................................................... 13
Debt Restructuring ............................................................................................................ 14
Inflation............................................................................................................................. 15
Growth............................................................................................................................... 16
Financial Repression ......................................................................................................... 17
Current Strategy....................................................................................................................... 17
Focus on Austerity in Most Advanced Economies............................................................ 17
Concerns............................................................................................................................ 18
Issues for Congress ........................................................................................................................ 20
Is the United States Headed for a Eurozone-Style Debt Crisis?.............................................. 20
Implications for the U.S. Economy ......................................................................................... 22
Policy Options for Congress.................................................................................................... 25
Fiscal Reforms in the United States .................................................................................. 25
Multilateral Approaches .................................................................................................... 26
Figures
Figure 1. G-7 Public Debt as a Percentage of GDP, 1951-2009 ...................................................... 1
Figure 2. Gross General Government Debt in the G-7 and Emerging and Developing
Economies, 2000-2016 ................................................................................................................. 9
Figure 3. Gross General Government Debt in Advanced Economies, 2011.................................. 10
Figure 4. Net General Government Debt in Advanced Economies, 2011 ..................................... 11
Figure 5. IMF Forecasts of Fiscal Cuts Needed to Lower Advanced Economy Debt to
60% of GDP by 2030.................................................................................................................. 19
Figure 6. Bond Spreads for Selected Advanced Economies.......................................................... 21
Figure 7. Direct Exposure of U.S. Banks to Advanced Economies............................................... 23
Tables
Table 1. Market Estimates of the Likelihood of Sovereign Defaults............................................. 22
Table 2. U.S. Bank Exposure to Selected Eurozone Countries...................................................... 24
Table A-1. Gross General Government Debt in Advanced Economies, Actual and
Forecasts ..................................................................................................................................... 28
Table A-2. Net General Government Debt in Advanced Economies, Actual and Forecasts.......... 30
Table A-3. Direct Exposure of U.S. Banks to Advanced Economies ............................................ 32
Appendixes
Appendix. Data on General Government Debt and U.S. Bank Exposure Overseas...................... 28
Contacts
Author Contact Information........................................................................................................... 32
Acknowledgments ......................................................................................................................... 33
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