Debt Bubble May Hamper Global Recovery

Last week's announcement that Dubai World could no longer service its outstanding debt highlighted the fact the world economy remains fragile. Indeed, the burst of a debt bubble may be next in the line, after a series of devastating asset and housing bubbles.
Anna Fedec, 12/3/2009 11:25:19 AM

And what's more stunning, not the poor nations but the richest are the ones who borrow the most. Japan is at the top of the list with the government debt ratio almost at 200% in 2008 and on track to reach 220% at the end of 2010. Also, the Greek national debt is projected to rise to 135.4% of GDP in 2011 and the Italy’s debt reached 105.8% of nation's output in 2008. And even in Germany, outstanding liabilities are expected to increase to 77% of GDP next year, from 60 percent in 2002.

Most importantly, government debt is sustainable if GDP growth is not bigger than the average interest payments on past debt.  And judging by the current pace of economic recovery, it will be very difficult to achieve that balance in the next few years, particularly if interest rates rise. For instance, it is projected that United States GDP will contract 3% this year while some U.S. treasuries were sold recently with 4% yield. To make things even worst, it is likely that within next few years, budget deficits will get even bigger as over-indebted consumers focus on rebuilding their savings and tax revenues deteriorate further.