European debt crisis: new candidates for the role of "leader

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European debt crisisGreece, which has been on the minds of investors in various countries for most of the last year and a significant part of this year, periodically recalls itself. It would seem that Greece has managed to avoid Default In March, the country reduced the share of total debt in GDP, a precedent was set for the settlement of creditor-debtor relations for the rest of European countries, however, at the beginning of the last week of the first month of spring, specialists have already Barclays Capital noted the widening of yield spreads of Italian/Spanish and German bonds and made a statement that the signs of recovery of the European economy from the debt disease are premature, and soon the crisis will make itself felt again.

Mechanism of government debt impact on exchange rates

Analysts of the British bank forecast further weakening of the euro against major world currencies, justifying it by the aggravation of debt problems of a number of Eurozone countries. Thus, the mechanism of influence on the exchange rate of such fundamental factors as "public debt".  In order to make sense of it it is necessary to go back to the beginning.

The economy of any state can be compared to an ordinary family budget. Just like any family, a country has its income and expenditures. However, if the primary unit of society has the main source of existence is wages, then for the state to fulfill its functions, taxes and non-tax payments are needed. If the income of the family budget exceeds its expenditures, people have the opportunity to accumulate money by investing it in time bank deposits or purchasing securities, if the opposite is true, they are forced to apply for credit.

Also a single country with the growth of budget deficit resorts to external and internal borrowing, and when there are surplus can become a creditor. Except that according to the basic postulates of economic theory moderate deficits are more favorable in terms of economic growth as it indicates an increase in government spending which subsequently has a favorable impact on gross domestic product.

Current situation global economy

At present, the budget of almost all countries of the world is characterized by deficit (the only exceptions are Brazil, Hong Kong and some other countries).

	Budget deficit to GDP,%	Public debt to GDP, %
Russia	-3.9	9.9
China	-2.5	17.7
Australia	-4.3	22.3
Switzerland	-1.3	55
Spain	-9.3	60.1
UK	-10.3	80
France	-7.1	81.7
Germany	-4.3	83.2
Canada	-2.1	84
Eurozone	-6.2	85.1
Portugal	-9.8	93
USA	-10.3	93.2
Ireland	-31.3	96.2
Belgium	-4.1	96.8
Italy	-4.6	119
Greece	-10.6	142.8
Japan	-8.2	220.3

 

Nevertheless, the state should be very careful with this indicator, because its growth leads to an increase in total debt. Indeed, just like any family, the state has to resort to the use of loans to finance the deficit. In this case, the optimal option is considered to be issue bondsone of the characteristics of which is yield. This indicator is mathematically closely related to the price, so its growth indicates a decrease in bond quotations, which is most likely caused by a decrease in demand. Consequently, the demand for Italian and Spanish bonds is currently decreasing, which indicates that investors are concerned about the return of invested funds in the securities of these countries. At the same time, according to the table, if in Italy the investors' concerns are related to the excessive size of public debt, then the Spanish economy is characterized by a bloated budget deficit. The second situation is less critical, because some expenditures can be sequestered. The deficit reduction program adopted in the Alpine country may have a detrimental effect on economic growth, as it implies the reduction of certain items of public expenditure.

Thus, it turns out that getting out of the debt hole is much more difficult than getting into it. And if Greece managed to do it, it should thank other countries, not itself.

On the edge of the abyss

According to a number of analysts, Italy, Ireland and Portugal may become the next candidates capable of "catching the Greek disease". The situation in the largest western British island is particularly interesting. Official Dublin has the largest negative value of the budget deficit vs. GDP (-31.3%) among all developed countries of the world. With such dynamics, default may not be far off.

The American and Japanese economies should be considered separately. Thus, the USA has been living in debt since the second half of the 18th century and feels quite well due to the fact that the amount of this debt is denominated in the national currency and the Federal Reserve System has flexible instruments for its regulation. In Japan, on the other hand, most of the total debt is domestic, which makes it possible not to resort to the help of other countries when restructuring it.

Thus, if the situation with countries that have a significant budget deficit and total debt to GDP is quite understandable, the states located at the opposite pole of the table can feel quite comfortable. In this regard, we would like to ask our readers, should we be critical of Russia's statements regarding plans to significantly increase domestic debt or are these measures capable of having a positive impact on the development of the domestic economy?