The Great Debate UK

from Breakingviews:

Sovereign debt maths show risk of vicious circle

How can a country support debt of over 100 percent of GDP for many years and then suddenly start spiralling towards insolvency? That question of sovereign debt maths is not merely academic. It is highly relevant to the likes of Greece and Italy.

The answer is that size of the sovereign debt burden is not everything when it comes to keeping up with interest payments. No matter how high the ratio of debt to GDP may be, it does not need to increase as long as the government has two factors going its way: the "primary" budget balance -- the balance before interest payments -- and the growth rate of nominal GDP.

To see how these play out, consider two countries. One has a moderate debt load, 50 percent of GDP, which carries a 4 percent average interest rate. If the budget is in primary balance, the government will still run a deficit of 2 percent of GDP, which is 4 percent (the interest rate) of 50 percent (the debt). As long as nominal GDP grows by 4 percent, the ratio of debt to GDP stays the same.

The other country is highly indebted, with a debt/GDP ratio of 100 percent. Assume it also pays an interest rate of 4 percent. With a primary budget balance, its fiscal deficit is 4 percent of GDP. However, as long as nominal GDP keeps growing at 4 percent a year, the ratio of debt to GDP stays the same -- 100 percent.

The UK should not waste its fiscal crisis

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hugodixon–  The author is a Reuters Breakingviews columnist. The opinions expressed are his own  –

 The UK should not waste its fiscal crisis. As Britain embarks on its election campaign, this is a perfect opportunity to engage in radical tax and spending reforms designed not just to restore the country’s fiscal balance but to boost its long-term productivity and competitiveness.

from Breakingviews:

Goldman Sachs needs to admit it made mistakes

By Chris Hughes

Even the mighty Goldman Sachs makes mistakes. The Wall Street bank's decision to help Greece keep some of its debts hidden from public view in 2001 was one of them.

The transaction allowed the Greek government to present accounts which understated the state's liabilities by 1.6 percent of GDP.

GDP figures show we’re not out of the woods yet

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MarkBolsom-150x150.jpg-Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-

As expected, Gross Domestic Product figures released today confirmed that the UK has finally emerged from recession. According to the Office for National Statistics, the UK economy grew by 0.1 percent during the last 3 months of 2009, bringing to an end 6 consecutive quarters of contraction.

from The Great Debate:

Icelandic, Greek sagas show sovereign risks

-- James Saft is a Reuters columnist. The opinions expressed are his own. --

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

from Breakingviews:

Recovery leaves too many big problems unsolved

ed hadas.jpgThe economic worst is past. But there are many issues left to worry about.

Start with the good news. GDP is now growing almost everywhere, while the unemployment rate is hardly rising anywhere. Businesses and consumers are less fearful. As much as half of the 20 percent decline in international trade has been erased.

Perhaps the best news is what has not happened. There have been no national defaults, countries dragged into political chaos, bitter divisions among the great powers or, with a few tiny exceptions, massive declines in consumption. The global political-economic-financial system is still in business.

Why is the UK still in recession when the U.S. isn’t?

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Recent U.S.  gross domestic product data show the world’s biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain’s economy contracted.

British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.

Re-entry dilemma for G20 ministers

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copeland1- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

As the G20 ministers gather for their meeting this week, there should be no doubt about the item at the top of the agenda: the re-entry problem. At what point should the expansionary monetary and fiscal policy of the past year be reversed? And, if the answer is “not yet”, how soon does the re-entry plan need to be announced?

Britain’s economy should learn to speak a little Chinese

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ross2- John Ross is visiting professor at Shanghai’s Jiao Tong University where he writes a blog on globalisation. The views expressed are his own. -

The success of China’s economic stimulus package has attracted increasing attention in Britain and internationally for two reasons. The first is simply its importance for the world economy. Second whether there are general lessons to be learned.

from Commentaries:

The case for GDP bonds

Around the world, governments are struggling to drum up buyers for the mountain of bonds they need to sell. And that's especially true for big deficit, low savings countries like Britain and the United States.

The returns they are offering on conventional government bonds are low and there's the risk of inflation eating away at their value. Perhaps it is time for a different approach.

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