The new debt crisis

In terms of debt ratio to GDP, compared to many countries, we're in good shape. In fact we're number 86 on the list. But in terms of the global economy, the shock of a country like Greece or Egypt going under would
engender another monetary crisis:


Nations' mounting debts worry global investors
Greece's troubles are a particular concern after bonds took a tumble
By Anthony Faiola
Washington Post Foreign Service
Saturday, December 12, 2009

LONDON -- The Greek government on Friday scrambled to put together an emergency plan to rein in its runaway finances amid fears that a debt crisis could reignite turmoil in world markets.

With big banks returning to health, the financial woes of entire nations have emerged as the biggest threat to the global economy. Though vows of swift action in Athens eased turbulent bond markets on Friday, analysts continued to warn of concerns even in pillar nations such as Britain.

Investors nervous about Britain's ability to manage its soaring debt in the years ahead dumped its bonds Thursday following the release of a government budget plan that failed to detail how the nation would emerge from under a massive pile of red ink.

Analysts and credit-rating agencies are warning that countries with already high debt levels have rung up historically large deficits during the financial crisis, with tax collection plummeting even as public spending has soared.

Observers are also growing more concerned about the yawning U.S. budget deficit; Moody's rating agency this week issued a report warning that the United States must come up with a plan to tackle the deficit or risk triggering higher interest rates and "a major deterioration in debt affordability that could come from a decline in confidence in financial markets."

But U.S. Treasurys still remain a relative safe haven given the size of the U.S. economy and increasing signs that it may be on the mend. By contrast, Greece is still mired in recession and more deeply in debt than the United States relative to the size of its economy. Investors have become particularly jittery since state-run Dubai World, stuck with almost $60 billion in debt, surprisingly announced a suspension of payments last month.

"Policymakers have taken nations into uncharted territories [of debt] with fiscal stimulus, and the truth is some nations may be reaching their limits," said Pierre Cailleteau, head of Global Sovereign ratings for Moody's in London.

Pressure for cuts
The pressure from investors to begin trimming gaping deficits is putting some nations in a tight fix. Most economists -- including those at the International Monetary Fund -- believe it is still too early for governments to begin rolling back the expensive stimulus programs credited with helping jump-start the global economy in recent months.

Yet investor pressure is forcing some countries to do just that. Seeking to boost confidence, deeply troubled Ireland this week announced $4 billion in cuts that will mean broad reductions in state payments to the unemployed and the disabled as well as in government salaries. Desperate to calm investors, Greece's new Socialist government promised to outline emergency cuts next week. The prospect of those cuts eased pressure on its bonds on Friday after their biggest sell off in more than a decade. But they also raised the specter that Greece's economy could take longer to recover while heightening fears of civil unrest.

The Socialist government came to power in October vowing to protect state salaries and public spending, "but now it's going to have to do the opposite -- they need to bring down spending," said David Riley, head of global sovereign ratings at Fitch. "This is part of the credibility problem they face -- they will say they are going to tackle the budget, but will they really be able to do it?"

Though a number of countries are under the weary eye of investors, no nation is under as much scrutiny as Greece.

The new government there shocked investors by revealing that its predecessors had dramatically underestimated the nation's financial problems. Revised data showed its budget deficit stood at 12.7 percent of national income -- double earlier figures -- and that its economy, rather than growing, had been in recession for more than a year.

Ratings cut
As doubts increased about the government's willingness to make tough cuts, Fitch on Tuesday lowered its rating on Greek debt for the second time in six weeks. Greek Prime Minister George Papandreou on Friday sought to calm investor fears, reiterating that the nation would not default on its $350 billion debt, while his finance minister said the government would cut spending by 10 percent next year, with details set to be outlined next week.

"I can say that we are a responsible country and we will live up to our obligations," Papandreou, who was scheduled to hold meetings with social leaders in Athens on Monday to discuss cuts, told the Reuters news service. "We are a new government, we have a new mandate and the mandate is for change so we are moving ahead on this. People support us absolutely."

Greece needs to roll over $82 billion next year in debt obligations. If investors demand too high a price via high interest rates for Greek bonds, some fear, the government may have no choice but to stage at least a partial default.

Before that would happen, however, many analysts believe the IMF would step in with a bailout. Such a rescue, though, would prove embarrassing for the government and likely require even tougher budget cuts as a condition of any deal. It is also possible that Germany, which shares a common currency with Greece in the euro, could step in to save it, as officials there suggested earlier this year. But that would be politically tricky, since rules supposedly prevent countries in the 16-member euro zone from lending money to others to help plug budget gaps.

Instead, most officials in Europe are pushing the Greeks to clean up their own mess by making tough cuts.

"Considering the gravity of the situation, I am confident that the Greek government will in the near future take the courageous and necessary measures required," European Central Bank President Jean-Claude Trichet told the Belgian economic dailies L'Echo and De Tijd this week.

It is funny how this topic becomes

Putin, can you please post a link to your story? Thanks!

The debt we are accumulating and have been accumulating for a while now is a serious problem.

If things get bad then those who are in better personal financial situations will do better than those who are not.

We all prep for disasters of the flu kind, now it is time to prep for a financial disaster.