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Solving debt issues will not be easy
Tue, 29 Jun Pre-Open

Debt and more of it has been deeply haunting the developed world especially Europe for a while now. In the belief that asset classes would continue to remain buoyant, huge sums were borrowed in the hope of better returns. The fact that the government came to the rescue of debtors did not help matters either. What is more, another trend that was observed over the decades was the increasing tolerance for debt. Being indebted no longer seemed a taboo like it once was.

As a result, what the world is witnessing now is debt amassed at every level of society. This would mean individuals, companies and governments. The latest financial crisis saw governments across the world pump in massive doses of money into their respective economies. With the result, that the balance sheets of governments themselves have severely deteriorated. As reported in the Economist, in America the amount of government debt per person has risen from US$ 16,000 in 2001 to US$ 34,000 now. Similarly, household debt has gone up from US$ 27,000 to US$ 44,000.

The obvious solution to this problem is to cut down debt. But that is easier said than done. Most of US and Europe have yet to completely recover from the ill effects of the global financial crisis. Trimming debt would obviously require years of austerity. This would only lead to a slowdown in economic growth. Not at all an appealing prospect to the rich world.

The three likely outcomes from this debt crisis are default, stagnation and monetisation of debt. All of these are rather bleak. Difficult as it may be, the only option left for indebted countries is make their way through their debts through economic growth. History, however, does not favour this option. As the Economist has pointed out, a McKinsey study has stated that out of 32 cases of deleveraging following a financial crisis that it examined, only one was driven by growth. European governments may have responded to the debt crisis in Europe by only promising more money. But this is only for the near term. In the longer term, it indeed seems an uphill task for developed nations to clean up their balance sheets.

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Feb 21, 2018 09:49 AM