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Tuesday, February 19, 2013

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 relatively new global concern, after decades of attention on debt levels in developing and emerging markets. Three Eurozone countries, Greece, Ireland, and Portugal, have turned to the International Monetary Fund (IMF) and other European governments for financial assistance in order to avoid defaulting on their loans. There are also concerns about the sustainability of public debt in Japan and the United States.

To date, many advanced-economy governments have embarked on fiscal austerity programs (such as cutting spending and/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 that more reforms are necessary to bring debt levels down, especially considering the aging populations in many countries. 

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 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. The focus of most advanced economies on austerity programs to lower debt levels could slow growth in advanced economies and depress demand for U.S. exports. Financial instability stemming from high debt levels could also impact U.S. markets and financial institutions. 
  • Policy options for Congress. Congress is debating proposals to reduce federal debt levels in the United States. Congress could urge the Administration to coordinate fiscal policies multilaterally to avoid simultaneous austerity measures that undermine the economic recovery. 

Date of Report: January 31, 2013
Number of Pages: 32
Order Number: R41838
Price: $29.95

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