For the moment, clear your head. Close your eyes. Think for a moment about what you think would be the world’s best financial system. What would be the first thing you think about? Would your financial world include massive amounts of government debt, impossible to repay within a reasonable period? Would it include countries unable to borrow for infrastructure because of their past mistakes in failing to pay off debt? Would it include any potential risk of default? Would there be debt at all?
Now, consider what we have today. Across the world, governments have, on average, debt loads of 60 percent of their gross domestic product (GDP). And the debts are not getting any smaller! Some European countries have some of the highest debt levels in the world, with Greece (168 percent) and Italy (144 percent) high on the list.
According to the International Monetary Fund (IMG), there are 23 countries with debt loads above 90 percent of their GDP. On top of the list of the most indebted countries are Japan (255 percent), Singapore (168 percent), Bhutan (123 percent), and the United States (123 percent). In addition to the massive debt loads of Greece and Italy, other European countries on the list include France (110 percent), Portugal (108 percent), Spain (107 percent), Belgium (106 percent), and the United Kingdom (104 percent).
The size of the debt problem presents the world with an incredibly difficult dilemma. How does the world bring down its debt level without harming economic growth for the coming generations? How will countries solve the debt problem?
An Approach That Considers Many Aspects
Given the size of the problem, countries will likely need to take an approach that considers all aspect of the balance sheet. Countries will likely need to address the issue through the use of economic policy, adjusting monetary and fiscal policy in tandem, and adopting innovative financial ideas that the world has yet to see. The magnitude of this issue likely means a comprehensive framework that comprises many levels of governments, some type of “friendly” relationship with the financial restructuring world and adopting economic growth strategies that may be quite different than what the world is used to seeing.
The Spending Side
As one would expect, the spending front will be, as it should be, on the docket. Countries will generally need to significantly slow, and in most cases, decrease spending. This is no easy task.
In addition to significantly slowing spending – and preferably reducing spending – many countries will likely need to adopt a closer relationship with financiers. Professional financiers will need to think through proposals from governments on ways to restructure debt, including potential debt relief initiatives, and come to agreement on frameworks for sustainable financing practices. These are the meetings you’d want to attend if you were someone on the inside.
Innovation, New Ideas Will Take Central Stage
Given the size of the problem, financiers with new, innovative solutions will likely get an ear with decisionmakers. It would not be at all be too surprising to see some individuals win new Nobel Prizes for their innovative, practicable solutions to the problem. Although unknown right now, there is a good chance that innovative financiers will likely suggest new models for debt restructuring, such as debt-for-nature swaps or equity-like instruments. These can offer answers for debt-laden countries.
As governments begin working through solving the world’s debt problem (if there is a solution), undoubtedly, some will suggest addressing the root causes. These root causes include addressing corruption, improving upon poor governance structures, and minimizing unsustainable borrowing practices. The list of possible solutions includes transparency, accountability, and institutional reforms.
Summing up, dealing with the global debt problem will require a focused effort from elected and unelected government officials, financial institutions, and, perhaps the most difficult to bring along, civil society. Although it is in no way known how governments and financial institutions will deal with the problem, the final solution will likely require a blend of spending policies that reduce ongoing commitments, cooperation from executives of financial institutions, structural reforms, and adoption of innovative financial mechanisms that the world perhaps has never seen. None of the process will be easy, and perhaps not for the faint of heart.