Debt Sustainability: A Global Perspective

This study presents the facts, arguments, and scenarios around public debt from a global perspective, especially the largest economies, which feature record debt and fiscal risks. There are four possible scenarios for debt reduction: governments could economize and reform, default, erode the real value of debt via inflation and negative real interest rates, or policy errors could prompt a loss of confidence, destabilization, and crisis. This fourth scenario, which occurred in the 1970s, would become a major global challenge if it were to happen again today.

Format: Paperback / softback
Length: 75 pages
Publication date: 15 September 2022
Publisher: Cambridge University Press

This study presents a comprehensive analysis of public debt from a global perspective, focusing on the largest economies, which are characterized by record levels of debt and fiscal risks. These risks are primarily attributed to factors such as population aging and financial imbalances. Despite the current low interest rates, it is inevitable that debt levels will eventually need to be addressed. There are four potential scenarios for debt reduction:

Governments can opt for economic savings and reforms to address the debt issue. This involves implementing measures to boost productivity, reduce wasteful spending, and enhance revenue collection.

Governments may choose to default on their debt obligations, which involves failing to repay loans or bonds. However, this option is highly controversial and can have severe economic consequences, including higher interest rates, reduced credit availability, and economic instability.

Governments can erode the real value of debt through inflation and negative real interest rates. This scenario occurs when the inflation rate exceeds the interest rate, resulting in a decrease in the value of the debt. While this approach may provide short-term relief, it can also lead to long-term economic challenges, such as reduced purchasing power and increased inflationary pressures.

Policy errors can lead to a loss of confidence, destabilization, and crisis. This fourth scenario, which was prevalent in the largest economies in the 1970s, can resurface in today's interconnected world if not addressed appropriately. It represents a significant global challenge that requires proactive measures and strategic planning.

In conclusion, public debt is a complex issue that requires a multifaceted approach. While the current low interest rates may provide a temporary respite, it is essential to address the underlying causes of debt and implement sustainable solutions to ensure economic stability and prosperity in the long term.

Weight: 173g
ISBN-13: 9781009218481