New forecasts for the government debt and budget balances of rich countries
AS THE euro area’s sovereign-debt crisis has gone from bad to worse, financial tensions now pose a grave threat not just to the European economy but beyond. Yet there is no simple gauge that explains why investors fret about some euro-zone economies while keeping faith with others that retain their own currencies. Judged by its towering gross sovereign-debt burden and its primary budget deficit (ie, excluding interest payments), as shown in IMF figures published on September 21st, Japan should be in the firing line. Instead its government continues to be able to borrow at extraordinarily low interest rates. One reason is that very little of the debt is held by foreign investors. Another is that, unusually, the government has big offsetting financial assets that bring down net debt to a more manageable 130% of GDP. Despite a relatively small primary deficit projected for this year, Greece is peculiarly vulnerable because of the scale of its indebtedness and the fact that so big a chunk of it is held abroad, a characteristic also shared by Ireland and Portugal, the two other bailed-out countries. As important, in joining the single currency, these economies lost the ability to reduce debt by inflation and to spur growth and competitiveness through devaluation. That makes investors fear that the only way to relieve oppressive debt burdens is through default.