I have mentioned before why US government spending is different than Eurozone government spending. Recently I read an article by Satyajit Das that highlights some of these, as well as touches on some other government spending issues:
- Since debt rarely gets repaid, the markets focus on the ability to pay the interest and whether or not the debt can be refinanced.
- When borrowing in its own currency (e.g. the US), “a sovereign’s capacity to borrow is only constrained by the willingness of investors to purchase its securities and the cost of that borrowing.”
- When used as the major reserve currency (again, the US) the ability to borrow is increased.
- If there is a large amount of domestic savings (e.g. Japan) the ability to fund is easier.
- A country that can’t print its own money and has high foreign liabilities (weaker Eurozone states) will have a harder time convincing the market it will be able to service the debt and then refinance it.
- This results in higher interest rates, which further constricts the ability to borrow. This is why the US can borrow more than countries like Greece.
- The more diverse and dynamic the economy, the more diverse the tax revenue streams; thus, the greater the ability to borrow will be.
- Current and expected GDP are huge factors in determining how much a country can borrow.
So putting this all together, you can see why Europe is fiscally struggling right now – a high % of foreign liabilities in a currency they don’t print and economies with anemic growth outlooks that aren’t diverse. Further, the resulting higher interest rates creates a vicious circle.
I am not saying the US fiscal situation is in great shape, but from the above comparison you can see why our interest rates remain so low and why we can continue to expand our debt to GDP ratio. In short, we ain’t Greece.
