Debt burdens choke growth

Article Highlights

  • Debt crises might be even bigger than they look

    Tweet This

  • As debt comes to maturity, sovereigns may find their debt-to-GDP ratios rise differently than expected

    Tweet This

  • As debt-to-GDP ratios rise to crisis levels, bond yields rise too, which in turn cause debt ratios to rise further

    Tweet This

The European Central Bank’s bond buying plan coupled with the German Constitutional Court's upholding the legality of European bailout plans has quelled concerns about the European debt crisis for now, but debt burdens of all sorts are choking growth in most major nations.  Debt crises might be even bigger than they look.  Non-government debt has the potential to become government debt if high rates of default cause financial crisis. Spain, with relatively small central government debt, finds itself in this position, as its banking system is weak and its regional governments have high debt burdens.

One factor to monitor is average maturity of debt burdens.  As debt comes to maturity, governments may find their debt-to-GDP ratios rise differently than expected as debt previously financed at low rates has to be rolled over at much higher rates, or vice versa.
In the end, debt crises are shrinking growth as economies collapse.  As debt-to-GDP ratios rise to crisis levels, bond yields rise too, which in turn cause debt ratios to rise further.  The chart below shows this trend for just a few countries, but nearly all OECD economies fall somewhere close to the trend line.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Daniel
Hanson

What's new on AEI

How the Common Core went wrong
image Election countdown: The mood, measurements, and mechanics
image Rubio's defense speech: Fearless, informed, and refreshing
image Sorry Kerry, there is little role for Iran in fighting ISIS
AEI on Facebook
Events Calendar
  • 22
    MON
  • 23
    TUE
  • 24
    WED
  • 25
    THU
  • 26
    FRI
Monday, September 22, 2014 | 2:30 p.m. – 4:00 p.m.
Policy implications of the new US labor market normal

We welcome you to join us as a panel of economists discuss US wage and price prospects in the coming months and the implications for the Federal Reserve’s current unorthodox monetary policy.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.