CHAPTER 76 The Kiss of Debt1
So the world managed to survive the deepest and longest recession since the Big One in early 1930s. It did so with extraordinary public policy support (fiscal and financial)—the price paid to stop the global economy from falling off the precipice. Two years later, ballooning fiscal deficits and rising public debt are raising investor anxiety about sovereign risk in many advanced economies. Ironically, the shoe is traditionally on the other foot coming out from deep recession. Sovereign risk concerns historically reflected profligacy in emerging market economies. In the past, Brazil, Mexico, Russia, and Argentina were notable examples of public debt defaults. Many others (Pakistan, Ukraine, and Iceland) were forced to restructure under threat of default. To a large extent, many emerging economies have changed their ways—tightening their fiscal belt, exporting more (some from new commodity resources), lowering debt-to-gross domestic product (GDP) ratio. Basically, implementing early fiscal consolidation (oftentimes forced on by promises of new credits).
This time, severe recession and recent financial crisis took a high toll on a good number of advanced economies in the eurozone—those with a history of fiscal problems, ignoring reforms in good times. Today, “biggies” like the United States, the United Kingdom, and Japan are made more vulnerable by weak economic (and jobless) recovery and an aging population—both likely to add to their debt woes, made ...