Tim Brinton

The Debt Death Trap

The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies. All successful financial rescues require the country’s credible willingness to impose fiscal austerity and structural reforms, as well as massive front-loaded official support to avoid a rollover crisis of maturing public and/or private short-term debts.

NEW YORK – The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Indeed, the OECD now estimates that public debt-to-GDP ratios in advanced economies will rise to an average of around 100% of GDP. The International Monetary Fund has recently put out similar estimates.

Within the PIIGS, the problems are not just excessive public deficits and debt ratios (in different degrees and measures in the five countries). They are also problems of external deficits, loss of competitiveness, and thus of anemic growth.

These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor-intensive and low value-added exports. After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply. The ensuing loss of competitiveness manifested itself in large and growing current-account deficits and slowing growth. The final nail in the coffin was the appreciation of the euro between 2002 and 2008.

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