Japan reminds strapped officials they need buffer
By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
WASHINGTON — When your credit card is nearly maxed out, dealing with emergencies can be tricky. A massive rebuilding effort may stretch Japan to its financial limits. Politicians in Washington and other overspending capitals should take note of the warning.
Trying to calculate a country’s available “fiscal space” — the additional amount they can borrow before markets demand a sharply higher premium — is guesswork. The global financial crisis took the public debt of advanced economies to 75 percent of GDP in 2009 from 60 percent in late 2007. And by 2015, the International Monetary Fund reckons, the average ratio may hit 85 percent. That’s perilously close to the 90 percent level where debt seems to really hamper growth, according to economists Carmen Reinhart and Kenneth Rogoff.
But all nations are not alike in their profligacy. They have different debt levels and different track records in dealing with debt. Based on those variables, new IMF research suggests that some nations — including Japan with its 200 percent debt-to-GDP ratio — have very little room to add new debt before markets balk. The United States and the UK, by contrast, probably have a bit more capacity, the IMF says. But that extra space could easily be gobbled up by unforeseen events, such as the earthquake-triggered disasters that may cost Japan 3 percent to 5 percent of its GDP to address.
And the unexpected isn’t so unusual. Reconstruction after America’s Hurricane Katrina in 2005 cost something of the order of 1 percent of U.S. GDP, while New Zealand’s recent earthquake could cost it more in relation to the country’s output than the current estimates for Japan. Then there’s the question of necessary-seeming activity abroad. President Barack Obama may be pondering the potential $300 million a week tab for enforcing a no-fly zone over Libya; if so, he won’t be alone among NATO members in wondering how to pay for it.
The United States and quite a few other developed nations would appear to have little headroom to deal with the costs of another bank crisis — much less, say, a new war. It’s something for those running cash-strapped governments to remember. If they don’t create breathing room, they not only have to make hard budget choices but also pray that Mother Nature will be kind.