When debt drowns growth

Change the levels of debt, from 2007 to 2011

By Carmen M. Reinhart and Kenneth S. Rogoff

Public debt in the advanced countries reached levels not seen since the end of World War II, there is considerable debate about the urgency to tame deficits in order to stabilize and ultimately, reduction of the debt as a percentage of gross domestic product. Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to stability, with many advanced economies already reaches or exceeds the important of 90 per cent of GDP marker and long-term growth. However, many prominent intellectuals still argue that debt phobia is very exaggerated. Countries such as United States, Japan and United Kingdom rather than Greece and the market not to treat them as such.

In fact, there is a growing perception that low interest rates today for the debt of the advanced economies offer a compelling reason to start another massive round of fiscal stimulus. If Asian Nations are spinning off huge savings excess in part as a byproduct of measures such as restrictions to actually force low-income savers to put their money in bank accounts with roofs of low interest rate imposed by the Government: why not seize the cheap money?

Although we agree that Governments must act with caution in gradually reducing the cost of crisis response, seems to us that it would be folly comfort in borrowing costs low today, much less for her performance as a "clear" signal for a major explosion of debt.

Several studies of financial crises have shown that interest rates rarely indicate problems of time in advance. In fact, probably should be particularly worried today because a growing part of the debt of the advanced countries is in the hands of creditors officers whose current willingness to forego short-term returns does not guarantee that there will be a captive audience by debts in perpetuity.

Those who would seek to lower costs for the provision of services should be remembered that market interest rates may change as the climate. Levels of debt, on the other hand, cannot be reduced quickly. Despite the politicians around the world as argued that his country will extend its way out of debt, our historical research suggests that growth alone is rarely sufficient to ensure that the debt levels we are experiencing today.

While we hope to see more than one member of the Organization for economic cooperation and development default or restructure its debt before the European crisis is resolved, it is not the greatest threat to the more advanced economies. The biggest risk is that the debt will accumulate until the cantilever weighs on growth.

At what point does debt a problem? In our study "Growth at a time of debt", was found relatively little association between public liabilities and growth of the debt of less than 90 per cent of GDP levels. But the loads over 90 per cent are associated with less than 1 percent average growth. Our results are based on a set of data of public debt that covers 44 countries up to 200 years. The annual data set includes more than 3,700 comments covering a wide range of political and historical circumstances, legal structures and monetary regimes.

Not suggesting that it is a bright red line by 90 percent; our results do not imply that 89 per cent is a safe level of debt, or 91 per cent is necessarily catastrophic. Anyone who is familiar with doing empirical research understands that vulnerability to crises and anemic growth rarely depends on a single factor such as public debt. However, our study of the crisis shows that public obligations are often "hidden" and significantly higher than official figures suggest. Furthermore, guarantees the balance sheet and other creative accounting devices that even more difficult to assess the true nature of the debt of the country until a crisis forcing everything to light. (Just think of mortgage lenders of U.S. Fannie Mae and Freddie Mac, whose debt is guaranteed officially never before the debacle of 2008).

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