Economics Weekly

Financial markets are becoming increasingly concerned about the loosening of fiscal policy that is now underway around the world as governments respond to the tumult in credit markets and the onset of recession.

Fiscal loosening raises risk of country defaults

 

Financial markets are becoming increasingly concerned about the loosening of fiscal policy that is now underway around the world as governments respond to the tumult in credit markets and the onset of recession. Public sector balance sheets globally are taking on some of the debt the private sector can no longer absorb. According to Bloomberg data for instance, in the period since the credit crisis first broke in 2007, financial institutions have raised $970bn in new capital; of this total, the public sector has contributed $471bn. But in addition to this, with tax revenue falling as economic growth slows and public spending rising as unemployment increases, budget deficits are getting bigger and net debt is rising as a share of gdp. This is the correct response to the crisis and will help foster economic recovery eventually, but the price is that the financial position of many countries is now deteriorating, in some cases quite sharply.
 

 

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