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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: Wharf Rat who wrote (73435)	5/2/2010 10:57:06 PM
From: tejek	Respond to of 149317

Greece a bad omen for others in debt By Edward Chancellor Published: May 2 2010 10:28 \| Last updated: May 2 2010 10:28 The Eurosceptics have long argued that a currency union was inappropriate for Europe. However, Greece’s problems are not merely to do with the single currency. Rather, they are the result of national profligacy. Other governments have also over-indulged themselves. If the current economic recovery falters, sovereign debt crises are likely to break out beyond the borders of Europe. The eurozone’s “one-size-fits-all” interest rate contributed to credit bubbles in the periphery. It also led to higher relative inflation, which has left countries like Greece, Portugal and Spain uncompetitive. With the traditional escape route of currency devaluation no longer available, these countries face severe deflationary pressures. Given such dire circumstances, it is small wonder the credit markets have lost confidence. It’s not all about ‘marble palaces’ - Apr-18Bubbles: a Victorian lesson in mania - Apr-11The Madoff story reveals more faults - Apr-04Ask not what to cut, but what to keep - Mar-28Reveal the ‘true cost’ of the croupier’s take - Mar-21Industry that feeds the bubble beast - Mar-14Yet it is possible that confidence in Greek finances would have collapsed even had the country never joined the eurozone. The key features of sovereign credit vulnerability are laid out in a timely new book, Sovereign DisCredit by David Roche and Bob McKee of Independent Strategy. The single most important indicator of credit weakness is the national savings rate. Greeks are among the world’s leading spendthrifts with a net savings rate of around -7 per cent of GDP, according to Tim Lee of Pi Economics. Japan, by contrast, has been able to finance the huge expansion of its national debt over the past two decades thanks to its traditionally high savings rate. However, as its population ages, Japanese household savings are set to turn negative. Both the US and UK also have negative net savings rates. Countries with low savings tend to grow more slowly and depend on external sources to fund fiscal deficits. In good times, governments have little trouble finding the money. Yet foreign creditors are more skittish than domestic ones; they take fright easily and during times of contagion are liable to force up interest rates, creating a debt spiral. This is what is happening to Greece where roughly 70 per cent of the national debt is held by foreigners. The stock of outstanding government debt relative to GDP is another important measure of sovereign credit standing. Research by economists Carmen Reinhart and Ken Rogoff suggests that when the government debt burden becomes larger than 90 per cent of GDP, economic growth tends to slow, reducing the tax revenues needed to repay the loans. Greece’s government debt to GDP ratio is forecast to reach a 135 per cent by 2011. Yet it is not the worst culprit. Japan’s government debt is set to climb to 227 per cent of GDP by the end of next year. The national debts of Britain and the US are also forecast to exceed the 90 per cent of GDP threshold by 2011. With their low domestic savings rates, the US and Britain depend on external financing. If foreigners were to lose confidence in either US or UK government finances, they would also demand higher interest rates. The IMF has calculated the level of fiscal frugality needed for countries to bring their government debt levels down to a sustainable 60 per cent of GDP. According to the Fund’s calculation, the US would have to run a budget surplus prior to financing charges of 4.5 per cent of GDP a year for 15 consecutive years to bring the national debt down to an appropriate level. Japan would have to run a fiscal surplus of some 15 per cent of GDP for 15 years to reach the same target. Rapid growth in government indebtedness is a further indicator of sovereign vulnerability. Mr Reinhart and Mr Rogoff observe that sovereign defaults normally occur after a frenzied run-up in debt. The average increase in debt in the four years prior to a sovereign default has been 40 per cent. By coincidence, Greek debt is forecast to rise by exactly this amount between 2007 and 2011. The national debts of the UK and Japan will climb by 44 per cent over the same period. Quantitative indicators of sovereign credit vulnerability do not tell the whole story. Countries with bloated government sectors and cultures of entitlement, such as Greece, are more likely to default. There is an alternative. History suggests that when governments raise taxes and cut spending they are less likely to default. Most governments, however, will follow the path of least political resistance. This will mean more spending and continuing fiscal deficits. Mr Reinhart and Mr Rogoff find that the cycle of sovereign defaults tends to pick up a few years after banking crises. Given the severity of the global credit crunch and the weak state of government finances in most advanced economies, it is unlikely that future sovereign debt crises will be confined to the shores of the Mediterranean. ft.com