Wednesday, January 28, 2009

Debt or depression?

PARIS - GOVERNMENTS' bold moves to spend their way out of recession are swelling their already big debt burdens, economists warn, but in the short-term, some may have no choice but to go deeper into the hole.

Seized by the financial and economic crisis that spread worldwide last year, the United States and European governments have moved to pour in money with massive rescue packages.

Economic stimulus measures in the United States have so far pushed its public debt to between 65 and 70 per cent of gross domestic product (GDP).

In early 2008, after the devastating US credit crisis erupted, former US president George W. Bush launched a stimulus package of 168 billion dollars (S$251.6 billion). As the trouble deepened late last year, he agreed a $700 billion (S$1 trillion) bailout for the country's banks.

Now the new US President, Barack Obama, plans another massive package of $825 billion in tax cuts and investments.

'Mr Obama needs to make his plan bigger,' wrote the Nobel Prize-winning economist Paul Krugman in the New York Times, however.

'My advice to the Obama team is to scrap the business tax cuts, and, more important, to deal with the threat of doing too little by doing more.'

The United States 'have the means to borrow more,' said Mr Marcos Poplawski-Ribeiro, an economist at France's CEPII economic research institute.

'The question is whether that's advisable. Whether the benefit of greater indebtedness is worth the effort.'

German authorities last week wrapped up a 50-billion-euro stimulus package, including a huge increase in public spending and tax cuts. Last year it launched a 480-billion-euro rescue for its stricken banks.

France unveiled its own 26-billion-euro stimulus effort in December and Britain on Monday unveiled a second multi-billion-pound bank rescue package aimed at kick-starting its stalled economy.

These measures in Europe however 'will not be sufficient to bring growth back to its level before the crisis', said Mr Poplawski-Ribeiro. And these countries 'have no more money to spend', he said.

Heavy borrowing by European governments has sparked concern that strains on bond markets could break up the bloc, prompting vigorous denials by European officials.

Concerns about weaker countries in the eurozone have driven to record levels the spread, or difference, between interest rates on debt issued by high-deficit member states compared to a key reference point, low-risk German government bonds.

The higher interest that indebted countries pay reflects the higher risk of default by these members.

Officials have been compelled to deny talk that this strain could tear the eurozone apart, while also insisting on the need for governments to keep deficits and debt under control.

Amid concern over anti-recession borrowing by governments, Portugal on Wednesday became the third country in the eurozone, after Spain and Greece, to have its sovereign debt rating lowered by the agency Standard and Poor's.

The ratings agency has also warned that Ireland is in the danger zone. A downgrade puts up the cost of borrowing for a government needing to fund a budget deficit.

'There are speculators who are playing on the possibility that the eurozone will fall apart,' said Mr Elie Cohen, research director at France's scientific research centre CNRS. 'That's absurd because it's in no one's interests to see countries leave the euro.'

One of Europe's problems, however, is the lack of a 'collective plan to help weak countries whose capacity to go into debt will be hindered,' Mr Cohen added.

He insisted Europe has room to go deeper in debt, but added: 'After the crisis, states will have to launch a policy of massive debt reduction.' -- AFP
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