Monday, March 08, 2010

The Global Debt Crisis

Running on empty: Alistair Darling's British government piggy bank

Marius Gustavson overviews the entire government debt situation, with an excellent analysis. Here's some quotes in the piece concerning the sceptred isle:
Though the PIGS acronym was apparently coined by British bankers, Britain, Ireland and Iceland also smell distinctly of bacon...

The report states that both the United States and the United Kingdom "have been among the worst performing sovereign CDS" in Q4 of 2009 and that "concerns are mounting about the increase of debt to GDP ratios in UK and USA, 97% and 75% respectively."...

The weakening of the British fiscal position has triggered a political debate on the urgent need for fiscal consolidation. A group of 20 economists, including Kenneth Rogoff, published a letter in the Sunday Times warning that in "the absence of a credible plan, there is a risk that a loss of confidence in the UK's economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery."

Responding to the arguments made by Rogoff and his cosignatories, another group of economists, including the famous Keynes biographer Lord Skidelsky and US economists Brad DeLong and Joseph Stiglitz, published a letter in the Financial Times. They support the decision of the British finance minister, Alistair Darling (Labour) to delay spending cuts until 2011. The letter argues that the "first priority must be to restore growth."

However, by tightening its fiscal policy too late, the government could make things much worse. Public borrowing, needed to finance the unprecedented peacetime deficit, will crowd out private investment, making an economic recovery even harder, thereby further weakening the country's fiscal position. This will in turn put pressure on the central bank to "accommodate" public borrowing (i.e., bond issuing) by printing more money. This is one reason why the pound is weakening.

On the suspicion of further depreciation of the pound, foreign holders of British debt will demand even higher yields, pushing long-term funding costs higher, thereby making the debt burden harder to service as interest payments shoot up. This is, in other words, a recipe for fiscal disaster unless drastic measures are taken in the near future.


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AllesClean24 said...

Alistair Darling's British piggy bank