FT.com / Why we should expect low growth amid debt

Comment: This opinion article comes from Carmen Reinhart and Kenneth Rogoff, authors of the book This Time is Different. Their fact filled and carefully research volume is a study of eight centuries of financial crisis. Their research implicitly illustrates certain patterns that emerge after a country undergoes a financial crisis. This short article is a nice summation of the risks and dangers that many developed nations and numerous emerging Eastern Europe countries face today.

Going into 2007 many emerging Asian countries were running fiscal surpluses. Most advanced economies, on the other hand, were running fiscal deficits year after year. After the crisis struck countries around the world reacted similarly. Both emerging and advanced economies implemented expansionary monetary and fiscal policies. Those counties with surpluses had less of a need to issue large amounts of debt to fund these measures. Many advanced countries who already were net debtors to the world were forced to issue massive amounts of debt to fund an exploding budget. While this may have mitigated the chances of a country falling into a deeper recession or depression in the short run, these programs have come at a cost.

Many of the emerging countries that are suffering under their debt load (including but not limited to Latvia, Lithuania, Bulgaria and Greece) have been provided with debt assistance in the form of loans by the International Monetary Fund to help mitigate a fiscal collapse. These policies are not without their limit. Countries have to, in effect, get their financial house in order. This has meant trying to do politically difficult things such as passing annual budgets subject to the IMF loan covenants. This has proved difficult.

Advanced economies such as the United States, United Kingdom, Japan and Spain have continued their costly fiscal policies for more than two years. The decision to end these programs and reign in spending will be difficult to time. If there continues to be weak consumer growth (and all of these economies rely on consumption) then removing the policies could pull the country right back into a recession. Keep spending and the country will find that its debt will be less desirable to the rest of the world. These countries will not be able to issue debt at such low interest rates indefinitely. If a countrys debt to GDP ratio rises, inherently making the country a riskier bet to pay of its debt, then interest rates will have to rise. This would only make debt more expensive to borrow.