Guru Gyan
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Guru Gyan

The Big Debt Piling Theory

Government debt levels around the world are piling up on the back of stimulus spending to keep the economy afloat amid pandemic.

Disruption

The United States debt is projected to exceed the size of the entire country’s economy next year i.e., passing 100% of the gross domestic product (GDP) of the country. The last time U.S’ debt-to-GDP ratio was this high was in 1946, the CBO said, after a huge uptick in spending during the second world war.

*Debt-to-GDP ratio is the ratio between a country’s government debt to its gross domestic product (GDP). It indicates a particular country’s ability to pay back its debts.

The U.S. Congressional Budget Office (CBO) has said that the federal budget deficit will hit $3.3 trillion this year. As a result of those deficits, federal debt held by the public is projected to rise sharply, to 98% of the GDP in 2020, compared with 79% at the end of 2019 and would exceed 100% in 2021, it said.

The increase in debt is mostly the result of the economic disruption caused by the coronavirus pandemic and the enactment of legislation in response, the CBO said.

Fellow peers

The United Kingdom (UK) government debt rose above 100% of GDP in May for the first time since 1963. Borrowing increased by more than 100 billion pounds ($124 billion) in the two months to May after a massive support package during the lockdown.

France, Spain, Italy are all projected to end the year with public debt levels of more than 100% of GDP. The International Monetary Fund (IMF) expects advanced economies average debt-to-GDP ratios to be above 120% in 2021.

Moody’s Investors Services has estimated that debt burdens in Brazil, India, and South Africa will rise to among the highest across the large emerging market sovereigns by 2021. Another report by Motilal Oswal Financial Services has stated that the Indian government’s debt is likely to hit a record 91% of GDP in FY21.

Affordability

With a huge load of debt of governments across the world, the question arises if they can deal with the debt overhang.

Low-cost borrowing and a strong recovery may allow the governments to grow their way out of debt. Countries with strong reserves (forex/gold reserves) are said to give foreign investors and credit rating companies added comfort that the government can meet its debt obligations even with a sliding economy outlook.

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