Advanced economies seriously consider cut their debt to prevent new financial crisis

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It is worrisome that handful of European countries are struggling with their indebtedness these days. To make matters worse, conceivably invincible no.1 economy of the world, United States is in need of raising its debt ceiling in order to avoid possible federal government shutdown or simply default due to the enormous amount of national debt. Major credit rating agencies, S&P and Fitch firmly warned that they will consider downgrading U.S Bonds rate. Failed to do so, it will cause nothing but a catastrophic effect to world economy as whole. In the wake of recent financial difficulty in European countries and soon-to-be United States, recent report from BIS(Bank of International Settlements) deliver a serious warning to advanced economies as well as emerging economies, including Korea that each economy entity should be able to control the level of fiscal debt to prevent new financial crisis.

Throughout the last year, world economy retained its recovery path from the financial crisis back in 2007. With vigorous economic intervention initiated by each government, such as QE(Quantitative Easing) 1, 2 by United Sates, the major advanced economies successfully bounced back from the recession headache and their GDP growth rate also shifted to positive territory again. According to recent statistics from IMF(International Monetary Fund), GDP growth rate of advanced economies estimated approximately 3.0% in 2010, which is significantly higher than -.3.4% in 2009 and also expect to continue to grow mid 2% level for the next couple years. Evidently emerging and developing economies surpass economic figures of advanced economies due to the continuous economic growth of China, India and other noteworthy emerging markets.

However, subsequent fiscal problems in Euro areas with combinations of weak economic data and current debt ceiling controversial debate in United States fear that recent economic pulse force to weaker and even deteriorating. Debt problem in United States ignited huge concern over global markets. If U.S Congress failed to agree with federal government in raising the current debt ceiling level, approximately USD 14 trillion by August 2 allegedly, U.S. government would not be able to repay the debt, effectively in default status. No doubt that it will cause tremendous amount of economic damage to U.S economy itself as well as global economy. So far, U.S congress and federal government are in a stalemate. Ongoing fiscal problems in euro area are necessary to figure out the solution to prevent more tumbledown of countries, such as Ireland, Greece. Based on the recent statistics, troublesome European countries, also known as PIIGS(Portugal, Italy, Ireland, Greece, Spain), show that their government debts either overwhelmed or close to their GDP level.

Two countries, Greece and Ireland, accepted EU and IMF bailout package with an austerity measure, which Korean had been through a similar process while back in Asian financial crisis. Still other countries, such as Italy and Portugal are being considered as next candidates for bailout program.

Furthermore, rising inflationary pressure leads each economy to reconsider its economic stimulus packages. In major advanced economies, consumer price index began to rise over a year with a surge in prices for food, energy and other commodities. Eventual it’ll push over the inflation hike, which apparently began to rise in gradual basis according to the graph below.

Regardless of relatively higher growth potential, emerging and developing economies, especially Brazil, China and India shows their inflation rates soar over a year now. Considering the current fiscal difficulty in euro area and budget battle in United States under this inflationary fueled economic situation, BIS strongly suggests that each fiscal government should take a prompt action to bring debt levels down to controllable and sustainable levels to prevent a new financial crisis. Certain measure shall be indispensably necessary, such as unnecessary government spending cut, even healthcare if it is needed indeed and less tax break on debt can be feasible to reduce a rising amount of debt. Since emerging markets is never be immune to this as well, Korea, itself, also must take a close look to control national debt in terms of precautionary measure.

Jin Mok Kim (jinmok.kim@gmail.com)

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