Too Much Debt

  As has discussed before, the main purpose for enforcing austerity policy is to rein deficit by reducing spending or even rising taxation in some cases. It is straight forward to understand that deficit is caused by government spending more money than its revenue. But how can the government get the exceeding money? The main approach is through debt. According to Reinhart and Rogoff (2011), the level of public debt in developed countries has been rising rapidly in recent years and has now reached the highest level since the Second World War. I would like to focus on the situation of Greece to check the amount of debt it used from 1980 to 2010, comparing with its domestic gross product.

data source: IMF world economic outlook database, September 2011

  From the figure above we can find out that Greece has been consistently using more and more debt over the last three decades. Interestingly the leverage ratio has risen sharply since 2007 and reached a peak of 142.757 percent of GDP in 2010. Such a high rate of debt creates huge instability and uncertainty. And this finally triggers the sovereign debt crisis. But why is Greece using so much debt known it is very risky to do this? It is partly due to the fact the interest rate stays at quite a low level in recent years and it is believed that government should benefit from this low cost lending to expand its economy. However, is this true and is it worth to do so? Is there any historical evidence to support this? I will try to figure it out in the next post.