Finance

Macroeconomic risk and financial risk to the financial system in developed countries

Discussions Public Debt Nature of the risk Public debt means the amount of money which the government of any country owes to its creditors . both foreign and domestic. The total debt for OECD countries has risen from 73 % of the GDP in 2007 to 106 % of the GDP in 2012 (OECD 2011).There are some developed countries like Greece , Italy and Portugal and Japan which have had historically higher level of debt. However the worry is that even countries like USA and UK are have now levels of debt which may be unsustainable in the long run. The debt level of United States has risen from 60 % in 2006 to 109% in 2012.The Euro zone is already suffering from the debt crisis and no immediate solution to the problem seems to be in sight. Causes of the risk The first question which comes to mind is reasons due to which high public debt exists. The simple reason for the high debt situation is because government of a country spends more than it earns. Public Debt can actually boost long term growth of the economy if it is used in building productive assets like infrastructure which invite more investment and increases the GDP of the country. However the problem in the developed countries has been that increasing amount of debt has been used to finance non productive activities. United States has been engaged in the decade long war on terrorism which has led to increased military spending and thus higher debt. High levels of pension and social security have been blamed for the Euro zone crisis which is again an unproductive spending (Sanderatne). The immediate reason for the debt levels of developed world to raise post 2006 has been the financial crisis of 2008 and the stimulus packages given by governments to bail out banks and to kick-start the economy (OECD 2011). The US government provided a fiscal stimulus package of $831billion.The problem could have been solved if this stimulus led to an increased growth but the world suffered from a double dip recession which has caused the developed countries to be in a precarious situation – GDP levels still remain low and the countries have a high debt on their hands. Consequences of High Public Debt High public debt has shown to have impact on the following areas – private savings , public investment , total factor productivity and the real interest rates. When government borrows more, it means that there is limited amount of money available to private investors which leads to lower private investment, lower growth of industries and thus lower employment and wages (Checherita and Rother.). Studies conducted by various researchers such as Manmohan Kumar and Jaejoon Woo for the IMF illustrate that once countries breach the 90 % level of debt , their GDP growth declines by as much as 30 %.Similar results have been obtained by studies which were conducted by the National Bureau of Economic Research (Kumar and Woo.). Debt taken by the government also

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