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Monday, October 31, 2011

Sovereign Debt in Advanced Economies: Overview and Issues for Congress

Rebecca M. Nelson
Analyst in International Trade and Finance

Sovereign debt, also called public debt or government debt, refers to debt incurred by governments. Since the global financial crisis of 2008-2009, public debt in advanced economies has increased substantially. A number of factors related to the financial crisis have fueled the increase, including fiscal stimulus packages, the nationalization of private-sector debt, and lower tax revenue. Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years.

High levels of debt in advanced economies are a new global concern. High public debt levels have become unsustainable in three Eurozone countries: Greece, Ireland, and Portugal. These countries turned to the International Monetary Fund (IMF) and other European governments for financial assistance in order to avoid defaulting on their loans. Japan’s credit rating was downgraded by Standard and Poor’s (S&P) in January 2011 over concerns about debt levels, and its rating was put on a negative outlook in April 2011. In August 2011, S&P downgraded longterm U.S. government debt from AAA (the highest possible rating) to AA+.

To date, many advanced-economy governments have embarked on fiscal austerity programs (such as cutting spending or increasing taxes) to address historically high levels of debt. This policy response has been criticized by some economists as possibly undermining a weak recovery from the global financial crisis. Others argue that the austerity plans do not go far enough, and do not share the burden of adjustment with creditors who, they argue, engaged in reckless lending. 

Issues for Congress 

·         Is the United States headed for a Eurozone-style debt crisis? Some economists and Members of Congress fear that, given historically high levels of U.S. public debt, the United States is headed towards a debt crisis similar to those experienced by some Eurozone countries. Others argue that important differences between the United States and Eurozone economies, such as growth rates, borrowing rates, and type of exchange rate (floating or fixed), put the United States in a different, if not much stronger, position. The United States has a long historical record of debt repayment, and bond spreads indicate that investors currently view the United States as far less risky than Greece, Ireland, or Portugal. 
·         Impact on U.S. economy. How other advanced economies address their debt levels has implications for the U.S. economy. Currently, most advanced economies are focused on austerity programs to lower debt levels. This could slow growth in advanced economies and, because they are among the United States’ main trading partners, depress demand for U.S. exports. If advanced economies shift to restructuring debt, U.S. creditors exposed overseas could face losses on their investments. As of March 2011, U.S. bank exposure to Greece, Ireland, and Portugal (to governments and the private sector) was $175 billion, less than 3% of total direct U.S. bank exposure overseas. However, U.S. banks and other financial institutions may have other potential exposures that could increase the effects of a financial crisis in the Eurozone.
·         Policy options for Congress. Congress is currently debating proposals to reduce the federal debt. Multilaterally, Congress could urge the Administration to coordinate fiscal policies to avoid simultaneous austerity measures that undermine the economic recovery.

Date of Report: October
19, 2011
Number of Pages:
Order Number: R41
Price: $29.95

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