A working paper written by three senior staff economists for the Swiss-based Bank of International Settlements warned there are several Western economies with hazard lights flashing.
Named were Austria, France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Japan, Britain, and the United States.
It was argued that without “drastic measures,” all of these countries will hit a wall of debt.
Long ago I read that the 1929 “crash” only reached a climactic stage when Creditanstalt Bank in Austria collapsed. That had a world-wide ripple effect turning the business contraction into a major disaster.
The BIS warned that 12 of the richest countries on the globe simply must take radical actions to reduce their debt. Things clearly cannot continue on their currently reckless path.
It has been estimated that within a year, the public debt of 30 major nations will exceed 100 percent of GDP—a mark that is perilously close to an abyss.
History repeatedly has revealed that this level becomes a breaking point.
Even that alarming total is missing “enormous future costs” that already are committed, which inexorably will inflate public debt even further over the next few years.
At this stage, the risk of default by governments is climbing rapidly. Furthermore, these unprecedented debt levels will increase “precipitously” in future years.
Unfortunately, to cope with this looming disaster, countries must begin at once to institute spending restraints. So far they have failed to do so except for a short period of time.
All of the big countries continue to make spending promises leading inevitably to more debt.
As a consequence, the financial markets certainly will not tolerate this to occur. The markets will intervene and choke governments’ ability to finance their operations.
Lenders will demand higher interest rates to compensate for the risks inherent in this situation. That, of course, will impede economic progress, hampering government revenues.
While this scenario is inevitable, the timing is imprecise.
Even Canada, which has done a better job in tackling this mess, will not be immune to these events.
What’s needed is an exit strategy from this problem. It will come either voluntarily or markets will force a change.
Political leaders must show their ability to convince the public that reforms are needed. Usually democratic countries do respond when the facts are presented in a straightforward way.
We must hope that this will take place before disaster strikes.
Bruce Whitestone, an economist, was educated at Yale University (where he graduated with top scholastic honours) and McGill University Graduate School.
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