The Unbearable Heaviness of Government Debt: The Ticker

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By Mark Whitehouse

For anyone who believes the U.S. is immune to the sovereign-debt problems  plaguing Europe, the latest analysis from the International Monetary Fund provides some sobering reading.

In its semi-annual Fiscal Monitor published this week, the IMF notes that the U.S., by some measures, is worse off than several countries at the center of the European crisis. Consider Italy, which has seen its bond yields rise as investors increasingly worry about its government finances. To get its debt burden down from the current level of about 120 percent of GDP to a more sustainable level of 60 percent by 2030, the Italian government would have to raise revenue or cut spending by an annual 4.1 percent of GDP.

To achieve the same goal -- taking into account expected increases in the cost of caring for retirees -- the U.S. would have to raise or cut about four times as much, or 17 percent of GDP (see chart). That’s about two thirds of the entire federal budget. As a share of GDP, it's almost as bad as Greece, and worse than Portugal, Ireland, Spain or even Japan, which has the developed world's largest government-debt burden, at about 220 percent of GDP.

So why are investors piling into U.S. Treasury bonds instead of running away? There are several possible explanations. For one, the IMF notes that the bonds are held largely by domestic investors, who are less likely to flee. Many investors in U.S. bonds are central banks, pension funds and other big institutions, which provide relatively stable demand. No other securities are as easy and inexpensive to buy and sell in an emergency as U.S. Treasuries. And the U.S. has a track record of getting its debts under control.

Still, achieving fiscal discipline will require almost unprecedented sacrifice. To reach a debt burden of 60 percent of GDP, the U.S. would have to run an average budget surplus of 5.4 percent of GDP for 10 years. According to the IMF, the U.S. budget surplus has never exceeded 2 percent in any ten-year period since 1970. The more the U.S. delays the process of getting its long-term finances in order, the more daunting the challenge becomes -- and the greater the chances investors' confidence will falter.

(Mark Whitehouse is a member of the Bloomberg View editorial board)

-0- Sep/22/2011 18:17 GMT