Is Greece the Tip of the Iceberg?

The sustainability of a government’s debt-to-GDP ratio depends on its current value, the size of the primary fiscal deficit, the interest rates the government needs to pay on its debt and the economy’s nominal GDP growth rate. Although the Greek government may have the most difficult task ahead, government debt in some other Euro-zone economies will also grow without bound under current policies. … The sustainability of a government’s debt-to-GDP ratio depends on its current value, the size of the primary fiscal deficit, the interest rates the government needs to pay on its debt and the economy’s nominal GDP growth rate. Although the Greek government may have the most difficult task ahead, government debt in some other Euro-zone economies will also grow without bound under current policies. Government debt-to-GDP ratios in Japan, the United Kingdom and the United States will also rise indefinitely unless significant fiscal adjustments are made. History shows that governments can achieve significant fiscal corrections, but these adjustments have generally been spread out over a few years. Belt tightening requires sacrifice, which increases as the speed of the underlying adjustment quickens. A government’s ability to deliver fiscal adjustment ultimately depends on the willingness of the public to accept painful spending cuts and tax increases. The questions that investors need to ask themselves regarding each of theses economies is whether the citizenry will have the will to bear the necessary pain. Answers to these questions likely will not be forthcoming overnight. Therefore, long-term government bond yields in economies that require significant fiscal adjustments could remain elevated for quite some time. Thank you for your interest in Wells Fargo’s Economic Commentary by Email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by Email registration page: http://www.wachovia.com/economicsemail.

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