In terms of national debt as a percentage of Gross Domestic Product (GDP), the answer is “YES!” How, you ask, do I arrive at that answer? Well, let’s examine the debt as a percentage of GDP in Portugal, Ireland, Greece, and Spain (PIGS), as well as in the US.
First, let’s examine the debt as a percentage of GDP in PIGS. These four countries received bail outs from the European Union (EU).
- PORTUGAL, 2011 Debt as a percentage of GDP: 108%, Bailout amount: €78 billion in May 2011. Fitch ratings agency has cut the credit standing of Portugal to BB+, junk-bond status.
- IRELAND, 2011 Debt as a percentage of GDP: 108%, Bailout amount: €67.5 billion agreed to in November 2010. Fitch Ratings gives Ireland’s sovereign debt rating a BBB+, although it said there was at least a one-in-three chance that the current Irish rating would be lowered by the end of 2012 or in 2013.
- GREECE, 2011 Debt as percentage of GDP: 165%, Bailout amount: €110 billion in May 2010 rescue package. A February-March 2012 agreement gave Greece another €130 billion in loans and cut €105 billion off its national debt by asking private investors to accept losses on the Greek bonds they hold. Fitch Ratings has downgraded Greece’s sovereign debt from B- to CCC, the lowest possible grade for a country that is not in default.
- SPAIN, 2011 Debt as a percentage of GDP: 68.5%, Bailout amount: Estimates range from €40 billion to €100 billion, but the bailout is for the banking system, not public finances. Spain’s banks are struggling with toxic property loans. (sound familiar?) Fitch Ratings downgraded Spain’s long-term foreign and local currency issuer default ratings to BBB from A, with a negative outlook. The BBB credit rating is just a notch higher than junk status.
Now let’s examine the US situation. The Congressional Budget Office (CBO) released new projections of a worsening US fiscal outlook. The CBO report says that by the end of fiscal 2012 (September), federal debt will reach about 70% of GDP, the highest level since just after World War II, and up from about 40% in 2008. Without changes in current policies, federal debt would reach about 200% of GDP in 25 years.
This source illustrates what is actually happening to the debt as a percentage of GDP. Under President Obama, the debt as a percentage of GDP went from 86.4% at the end of 2009 to 99.7% at the end of 2011. So you can see that, using actual data, debt as a percentage of GDP has surpassed Spain, is knocking on the door of being the same as in Portugal and Ireland. If CBO estimates are to be believed, unless fiscal policy changes, the US will surpass Greece.
Further, Fitch Ratings (one of the world-wide big three ratings companies, along with Standard & Poor’s and Moody’s) said again that it would cut the US sovereign debt credit rating unless government creates a “credible” fiscal consolidation plan and reduces the deficit. Ed Parker, sovereign ratings analyst, said that the US is the only country (of four Fitch major AAA-rated countries) which does not have a credible fiscal consolidation plan, and its debt as a percentage of GDP is expected to increase over the medium term. In November, 2011, Fitch revised down its credit outlook for the United States to negative from stable. A negative outlook signifies there is a greater than 50% chance of a credit rating downgrade.
Standard & Poor’s, in August, 2011, cut the US credit rating to AA+ from AAA. It has held it with a negative outlook ever since. Moody’s Investors Service has the US rated at Aaa, also with a negative outlook as of November, 2011.
The EU has bailed out PIGS. When it becomes the US’s turn for a bail out, to whom will we turn? And, will we have to cede sovereignty in order to get a bail out? Part of the terms of the bail outs for Greece, Ireland and Portugal included visits by foreign financial monitors to make sure they are complying with rules imposed on their handling of their economies.
But that’s just my opinion.
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