Debt and the double-dip danger

Over the weekend of the 5 and 6 February, the finance ministers of the G7 countries (Canada, France, Germany, Italy, Japan, the UK and the USA) met to discuss the state of the world economy. They agreed that the recovery was still too fragile to remove the various stimulus packages adopted around the world. To do so would run the risk of plunging the world back into recession – the dreaded ‘double dip’.

But further fiscal stimulus involves a deepening of public-sector debt – and it is the high levels of debt in various countries, and especially the ‘Piigs’ (Portugal, Ireland, Italy, Greece and Spain), that is causing worries that their debt will be unsustainable and that this will jeopardise their recovery. Indeed, the days running up to the meeting had seen considerable speculation against the euro as worries about the finances of various eurozone countries grew.

Of course, countries such as Greece, could be bailed out by other eurozone countries, such as Germany of France, or by the IMF. But this would create a moral hazard. If Greece and other countries in deep debt know that they will be bailed out, this might then remove some of the pressure on them to tackle their debts by raising taxes and/or cutting government expenditure.

Group of 7 Vows to Keep Cash Flowing New York Times, Sewell Chan (6/2/10)
Forget cuts and keep spending, Brown told Independent, Sean O’Grady (9/2/10)
European debt concerns drive dollar higher during past week Xinhua, Xiong Tong (6/2/10)
G7 prefers to stay on stimulants Economic Times of India (7/2/10)
G7 pledges to maintain economic stimulus Irish Times (8/2/10)
Mr. Geithner, On What Planet Do You Spend Most of Your Time? Veterans Today (6/2/10)
Gold Price Holds $1,050 – Gold Correction Over? Gold Price News (8/2/10)
Darling ‘confident’ on economic recovery at G7 meeting BBC News (7/2/10)
Britain has to fight hard to avoid the Piigs Sunday Times (7/2/10)
Europe needs to show it has a crisis endgame Financial Times, Wolfgang Münchau (7/2/10)
Speculators build record bets against euro Financial Times, Peter Garnham (8/2/10)
The wider financial impact of southern Europe’s Pigs Observer, Ashley Seager (7/2/10)
Medicine for Europe’s sinking south Financial Times, Nouriel Roubini and Arnab Das (2/2/10)
Yes, the eurozone will bail out Greece, but its currency has taken a battering Independent on Sunday, Hamish McRae (7/2/10)