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Debt catches up with eurozone and US

19 july 2011, 16:18
0
Secretary of the Treasury Timothy Geithner. ©AFP
Secretary of the Treasury Timothy Geithner. ©AFP
Having lived on easy credit for many years without too many problems, the United States and Europe are now finding out the hard way that the buck -- and the bill -- has to stop somewhere, AFP reports.

The problem is that after decades of easy living, no one wants it all to end even if the debt is of stratospheric proportions and the future risks being in hock for what will feel like an eternity.

On Thursday, European leaders meet in Brussels for an extraordinary summit on a second bailout for debt-stricken Greece as nervous markets wait in hope for a deal that will tame a crisis threatening even more countries.

In Washington, President Barack Obama appears locked in a life-and-death struggle to increase the budget ceiling and so save the US government from an unprecedented default that could tip the world back into recession.

A eurozone or US default could have horrendous consequences, causing credit to dry up, starving the economy of the key element for growth and likely setting off a chain reaction around the globe.

US Treasury Secretary Timothy Geithner said Thursday he expected the two sides to come to an accord but also warned of the dire consequences of failure.

A US debt default "would bring the world economy ... because of the critical role we play in the global economy, to the edge of recession again. And again, it's not an option we can consider," Geithner said.

Like the eurozone, the United States now finds itself under the ratings agency microscope, with Standard and Poor's and Moody's threatening to downgrade its debt from its top triple-A grade unless a deal is made.

A downgrade would be a "little earthquake," Nicolas Forest, analyst at Dexia AM bank said, with the world seeming on the point of change that seemed highly improbable only months ago.

The "solvency of sovereign states is no longer to be taken for granted" Italian central bank chief and future head of the European Central Bank, Mario Draghi said last week.

Credibility must be "earned in the field with high and sustainable growth, which is only possible with public accounts in order," he added.

The reasons for the debt debacle either side of the Atlantic are well known.

The eurozone and the United States, like much of the developed world, got used to living on credit, accumulating debt that breached prudent accepted norms of 60 percent of Gross Domestic Product -- the specified EU ceiling.

The 2008 financial crisis turned the debt screw tighter still -- governments borrowed heavily to pay for expensive stimulus programmes to keep their economies on track, but it seems only to have worked for a while.

Growth has slowed, especially in the weaker eurozone states which have needed bailouts -- Greece, Ireland and Portugal -- and in those countries -- Italy and Spain -- seen as most at risk.

Faced with an enormous bill, European and US leaders face serious political obstacles if they are to balance the books by cutting spending and raising taxes, said Carsten Brzeski, economist at ING bank.

In the United States, lawmakers face-off over raising the debt ceiling while in Europe, Germany bickers with France and the European Central Bank on how to save Greece, leaving the financial markets in agonies of uncertainty.

While a US default seems unlikely, the eurozone is a real concern to investors, analysts said.

This is manifested on the markets, with US government bonds keeping their reputation while eurozone debt, with the exception of Germany, under pressure.

No one doubts that short-term solutions will be found but how will countries evolve in the long-term while carrying a heavy debt-burden and achieving only modest growth, analysts said.

For now, Washington is clearly betting on growth while Europe is taking the austerity path -- as in Italy, where parliament passed 48 billion euros in cutbacks in record time last week.

All the time, the emerging economies meanwhile keep growing, led by China.

With public debt at 36 percent of GDP and double-digit growth, Beijing seems the great winner in the developed world debt debacle, establishing itself as Washington's top creditor and an increasingly important buyer of eurozone debt.

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