So which countries are in the biggest trouble? The ability of a government to honour its debt depends on a number of factors, in particular the size of the debt burden relative to GDP, the interest rate paid on that debt relative to the economy's growth rate and the size of the government's primary budget balance--the surplus, or deficit, before interest costs.
Which Countries Have The Biggest Problems?
Tuesday, February 23, 2010
Markets have suddenly woken up to the idea that not all government debt is risk-free. There is a long and not very honourable history of sovereign default, either explicitly or implicitly via inflation and currency depreciation.
If the interest rate paid on public debt is higher than the economy's growth rate, the stock of government debt will rise as a share of GDP unless governments run a primary budget surplus. The bigger the stock of debt, the bigger that surplus needs to be. This arithmetic suggests that countries with big primary deficits, big debt stocks and a big gap between interest rates and growth are most vulnerable.
This can be a self-fulfilling process. Investors will worry about governments' ability to service their debt and will push up yields, making debt servicing even harder. The shorter the maturity of the debt, the quicker this problem will arise. And if the debt is denominated in a foreign currency or held largely by foreign creditors, then a debt crisis can be compounded by a currency crisis.
Japan looks worrying on many measures, for example, but has long been able to fund itself by issuing government debt to domestic investors. America's debt remains the sanctuary of choice when risk aversion rises. Some, like Ireland, have already taken tough decisions to get their finances under control. But as Greece and others are finding out, they will all face severe pressure from the markets to bring their deficits under control. And that may cause a political as well as a fiscal crisis.
Labels: Economy and Business
posted @ 11:32 AM,
1 Comments:
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At February 18, 2010 at 5:03 PM,
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Very good. what about the sovergein guarantees being given by the Governemnt of Pakistan. Would the foreign lender to any project in Pakistan would like to finance? If yes, at what rate?
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