The article on the New York Times by Sewell Chan recently mentions three new research papers about the debt level of G7 countries. These papers are written by economists of International Monetary Fund to alert indebted countries about the probability of defaults. As the result of the financial crisis 2008, the wealthiest countries of the world G7 are going to have the serious troubles, the increasing in bad- debts. In the first research paper, two experts Carlo Cotterelli and Andrea Schaechter say that G7 countries should recover their government by cutting public spending, however, without the hasty actions. Moreover, these countries should stay still the main role in basic services and play the role of arbitrators retaining the fairness for all individuals in playing field. The first two authors also state that it is important to keep the interest rate as low as this time because the low interest rate creates good conditions for adjustment the financial situation. In the second paper, another author Jonathan D.Ostry considers another issue, the difference distance countries have before they really touch the defaults. Each country has different process to keep it away from the worst financial situation. Depends on the unsustainable level of finance situation of each countries, some need to correct their historical mistakes immediately by necessary fiscal changes; other can have some more foreign loans. Finally, the last study asserts that the main reason of defaults is not high interest rate; it is the structural deficit. And, the default is not a solution which helps the indebted countries escape from the bad financial status .It is just a step these countries meet on their way to refinance the crisis. Chan, Sewell. (2010, September 1). Monetary fund warns G-7 on Debt levels. Retrieved from http://www.nytimes.com/2010/09/02/business/global/02imf.html?_r=2&ref=business.
International trading is a procedure in which many countries interact with others. Through trading, countries purchase or sell their products and services. The loans and debts are established during this process. Also, because of some political purposes, some countries bail other countries out. Sometimes, the debt is to buy weapon serving for wars. As the result, the loans and debts happen more frequently between countries. Many countries now are suffering the bad-debt that they are unable to pay off. This situation happens to not only the poor countries, but also to developed countries. For example, The USA now is suffering the foreign debt from China and other developed countries such as EU. The USA government couldn’t pay off of easily for all taxpayers so it has to borrow from other governments to temporary fulfill the public demand.
There are some reasons leading to the default of a country. They are the mismanagement in public spending, the involvement in wars, and the neglect paying off debt in the good time of the economies. A famous case about the bankruptcy is Greece which has had a history of financial mismanagement. During the time holding Olympic Athens 2004, Greece spent excessively because its government highly expected that it would receive the profitable return from this international event. Unfortunately, Greece didn’t receive the result as it had expected. The lack of foresight of Greece government translated into a very bad financial situation. And it was official unable to shoulder it debt. Furthermore, there is a fact that the governments of indebted countries haven’t concentrated on solving the public debt even in a good time of developing economies. According to Carlo Cottarelli and Andrea Schaechter, public debt has been rising in bad times but not declining much in good times. (2010, September 1). “Monetary fund warns G-7 on Debt levels”. Obviously, the more the indebted countries neglect solving the debt in the good time, the more heavy debt they incur in the crisis time.
The increase in population’s age is another cause of debt. The increasing in age of population age means more dependent people in a society. The governments are more responsible for paying retired salary, health care services, and other social services. This increase also means the decrease in the number of people who are able to work and contribute to the society. Turns out, public debts becomes the global haunt of many countries.
It is necessary to change this financial situation. Some countries consider defaults the strategy to get out of debts. However, it is not a solution because the indebted countries can’t originally fix their mistakes by defaulting. The mismanagements, the neglects of paying debts, the structure deficits still exist. In the above article, the author summarizes the main ideas of three research papers in order to warn the indebted countries about the dangerous position that they are standing on, and give them some objective recommendations how to get out of debts without being too abrupt, therefore, successfully recover the economies.
Facilitator : Nga Nam Nguyen ( posted September 5, 11.58am)
Thank you for an interesting article about G-7 debt levels. Your response showed a good understanding of how to summarize. You also showed analysis (critical thinking) by relating some government spending to political and war purposes. You also connected a current example to the United States’ debt with China and some European Union countries. Your analysis, sometimes, slipped back into summarizing the article, but as a first facilitator with no examples to guide you, I think you did a nice job. To get a conversation started among your colleagues, it may have helped to pose a question for them to ponder and respond to (see facilitator rubric: “pose engaging questions, elicit responses, engage the learners in an activity or task”). You can still do this by adding another comment to our website. Nevertheless, you showed a clear understanding of the article being discussed.
Please feel free to continue the conversation as your colleagues respond. You can continue to facilitate by keeping the discussion focused on the topic, provide structure, and answer questions.
Thanks so much for your comment Mrs. McDermid.
Here are some questions that people might think of for this topic.
1. What do you think the indebted government should do to recover their financial status.
2. Do you agree with economists that the indebted governments shouldn’t get out of debt without being too abrupt?
3. Think of your country’s financial situation. Is it indebted? and why?
I look forward for your responses . Thank and have nice holiday!
The article in which is edited by Sewell Chan and published by New York Times, mentioned about the high debts of the G7 Countries.Since the year 1960s the debts of G7 increased and with the help of the 2008-9 financial crisis it reached to the maximum level that International Monetary Fund (IMF) warns the wealthiest countries called G7 ( Japan, USA, Germany, UK, France , Italy and Canada) about control over its high level of debts. In the article there is three authors. These are ; Carlo Cottarelli, who is the director of Fiscal Affairs , Andrea Schaechter who is a senior economist and Jonathan D. Ostry. These authors mentioned about the appropriate solutions in order that G7 countries can get rid of the financial problem of debts and G7 can recover its economics. There are 3 research papers published. In these papers, the fund’s economists offered stern admonitions while cautioning against an overreaction.The messages are collected in one paper on the long run trends in the public finances of the G7 economies.
It is a well known fact that the economic crisis which started in the USA with the mortgage crisis spreaded all over the world. It even affected the wealthiest countries of the world called G7 countries.According to article, Carlo Cottarelli and Andrea Schaechter claim that, G7 can recover its economy by the method of shortage of the public expenditures.Because of the the mismanagement of equilibrium point of their economics. In the past there are several collapses happened in the economy of the countries. For example; The Argentine economic collapse was during the late 1990s and early 2000s. The crisis started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth. In my point of view, similar with the Cottarelli and the Schaechter’s approach , it is a beneficial idea that decrease in Public expenditures contributes G7 countries to recover the economic situation of G7. The increase in the property tax rates , motor vehicle tax to the tax on wealth, such as adding an extra payment processing, bridges and highways to increase fees, increase their contribution to health spending and public spending is cut. For instance; in Turkey, SGK which is same with Social Security Organization in USA worked with the Ministry of Finance and they declared that the examination of participation of the patients is increased. This art entered in to force in October 1, 2009. By the method of examination of the contribution, the needs of persons with non-professional groups of patients, healthcare facilities are needed to prevent the unnecessary usage. In addition to these public expenditures , arbitrary stuffs such as cigarette and alcohol can be taxed with the ratio of 100 % This would contribute to both public health and discourage people to buy. Like the USA did. These two authors also mentioned about the age problem of G7 countries. For me, the old population means not productive population. They are in the consumption group. It means it is a cost for the government and the economy. The reason why I am thinking in this way is, if the retirement age of people in a country is 60, although they do not work, government have to provide them social security which is a debt. Also, their health expenditures are also a cost which is rovided by the government. For example; in Turkey the retirement age is 60. In the recent years this age limit The age limit should be increased according to the countries life standards of living. After retirement, goverment pays these people huge amounts of money that they served the government many years. As logically, they were given enough salary while they were working. They have social securities and covers most of the things like medical operations or treatments. They also do not pay any money to the prescribed medicines because government pays instead of them. For me , if the retirement age is increased from 60 to 70 , the expenditures would decrease. G7 countries are old populated and for me the increase in the retirement age in G7 Countries would help its economic recovery huge amount. They also mentioned about the neccesity of fiscal adjustment and while making these adjustments like downsizing, they should be fair among the individuals. In addition to these the neccesity of downsizing of government for the recovery of debts. Like the companies do in crisis times, they get laid off the workers. According to me governments make downsizing but not dismissing people from the work. They should select the job applicants who are capable of multitasking. In other words, if I were them, I would prefer to take the job applicant who does not only studied Business Administration but also the applicant who also studied International Relations or Advertisement. In other words, instead of paying three different people, I would prefer to pay only one worker who carries a lot of capabilities. We can say 3 in 1. These two authors claimed that although the debts and the budget deficit of G7 countries are high in terms of that the low interest rate application method the debts can be controlled. For me, G7 countries can take loans from emerging countries like Turkey that they can much more lowered the interest rates. The interest rates in Turkey is lower than the other countries. A second IMF paper by Jonathan D. Reily’s claims that public debt between countries differ between what is sustainable and what is not. Some countries like Australia and Norway have little fiscal resposibilities while other countries like Japan have many. I think the public expenditures are mostly correlated with the needs of the public. The only thing to keep these small countries sustainable is if interest rates do not increase from being triggered by negative economic shocks. I think, the main problem of the G7 countries is not the problem of if the interest rates increase or decrease. Their main problem is high level of public debts and it is unneccesary to worry about the interest rates.
In conclusion, in order to reduce the debt levels of G7 countries, Public Expenditures should be minimized, they should make new reforms especially about the retirement policy and health . Not only temporary precautions are taken but also the long term cautions should be formed.
I like your ideas about increasing the retirement age from 60 to 70 years old, taxing alcohol and cigarette up to 100%, educating people with “3 in 1” capabilities.
Is the increasing in retirement age from 60 to 70 suitable? I wonder about its real effects. That means people have to work longer while their retirement pensions are cut down? Will they end their career with a dismissal letter because of the considerable decrease in labour productivity at the age from 60 to 70? I think this solution can make the living standard become lower.
Just my opinion (^_^).
Debbie.
by
Diep Dinh (Debbie)
September 7, 2010 at 4:58 am
Nihal shows a good command of academic English vocabulary, nice job!
In this article, it is stated that International Money Fund warned G-7 countries on their debt levels and advised them by three research articles. According to the article, G-7 Countries increased their spending since the mid-1960s and now they faced record level of debt by help of 2008-2009 financial crisis.
1. What do you think the indebted government should do to recover their financial status.
2. Do you agree with economists that the indebted governments shouldn’t get out of debt without being too abrupt?
3. Think of your country’s financial situation. Is it indebted? and why?
1. The indebted governments like my country should downsize while not preventing itself from playing a key role in the provision of basic services, and in particular in maintaining a level playing field by giving equal opportunities to all individuals regardless of their conditions at birth. They should also continue to keep their interest rates at low level in order to control their debt service payments. Governments like my country should adopt fiscal retrenchment and improve their historical mistakes by taking necessary actions in fiscal policy. They should adopt these policies because otherwise a sustainable economy can turn into unsustainable economy. They should not adopt strategy like defaulting and they should focus on their structural deficits.
2. Yes. This should not be too abrupt. The downsizing of government should not affect of providing of basic services and should maintaine a level playing field by giving equal opportunities to all individuals regardless of their conditions at birth as the article stated. It should be done under control and step by step. Otherwise I think it can create an unsustainable economy.
3. My country is a debited country. It has little space for borrowing and it should adopt fiscal retrenchment policy and improve its historical mistakes by taking necessary actions in fiscal policy. It is indebted because our previous governments made mistakes for managing our fiscal policy and economy. They did not support manufacturing and R&D in my country. Furthermore they could not put an effective policy for public expenditures. People which came to age of 40 became retired so our economy could not feed them. Also foreign investors played many roles for bad economy of my country. Now good fiscal policies are carried out and our economy gets better day by day. People now retire at age of 65 in my country and manufacturing and R&D processes are supported by government. Furthermore, many state-owned firms are customized so our government got rid of those burdens. Many policies like customizing state-owned firms are carried out and today we are still a debited country but much less than we were.
Thanks for your instructive summary about the article because I really had difficulty understanding the article itself. Your examples are enlightening for me.
First of all, although I have little knowledge about economics and business, I will try to tell the condition about debts in my country – Turkey. More than 72 million people are living in Turkey and majority of this population is young people. However Turkey can not use this young population for its benefit because of the high unemployment rate. To prevent this unemployment rate and crisis, firstly Turkey needs to bring down the birth rate. Secondly, Turkey needs to apply new employment policies to create new job opportunities to the young population. The upgrowth depends on the imports and it always creates current account deficit. Turkey therefore should improve the production and do exports instead of imports. Turkey also levies high taxes and social security taxes from job providers and this also leads unemployment. Employers should not be faced with higher taxes, they should be encouraged for new business ventures. By this way unemployment may be prevented, and Turkey does not need to provide hugely social service. Although people in Turkey are levied heavy taxes, there is still deficits in Turkey. Since it has to spend more to social services than it takes from taxes. But I do not agree Cottarelli and Schaechter that indebted countries need to downsize their governments because it was tried in Turkey and did not work. Unemployment is already a problem in Turkey so downsizing only makes our situation worse. Instead of downsizing, Turkey should make new investments in the area of biotechnology and nanotechnology. It should give more importance to reseach and development. The agricultural industry in Turkey needs to be improved. Turkey is very underdeveloped about agriculture among other countries. It still does not use machines in agriculture. Briefly to stop its debt, a radical change is necessary for Turkey otherwise it never escapes from going into debt. But I do not know when is the correct time for this radical change to get out of their debted status. Therefore I agree IMF economists that indebted countries should not be too abrupt to change something. There is already a crisis in indebted countries and we do not want another one with a rapid change. Consequently, to cease its debt Turkey should encourage employers for new enterprises. By this way Turkey will use its young population as labor force for its benefit and the working people can pay the taxes of the government. And new working areas will help Turkey to enter the global market more. It will be able to export more and it will not need to import from other countries.
by
F. Bengu Cetinkale
September 7, 2010 at 1:48 am
Dear Bengu,
It is good to read your response. To clarify more about this topic,I would like to ask you a question.You said, “Instead of downsizing, Turkey should make new investments in the area of biotechnology and nanotechnology”.Have you ever think of the source from which the Turkey government has fund to invest in biotechnology and nanotechnology? is It another debt?
Yes Nga, Turkey needs to barrow funds from foreign countries to make new investments and to develop its industry. Therefore I called it a radical change. Only in this way it becomes developed and gain a role among the powers of the world in the global market. There are also wealthy employers and entrepreneurs in Turkey that can provide these funds for new enterprises however they face with heavy taxes and lots of procedures instead of being encouraged by the government. I think this would be the only chance for Turkey to go upside. We have lots of natural resources but we are not able to use them correctly because our industry and technology leave behind the other countries.
by
F. Bengu Cetinkale
September 7, 2010 at 4:44 am
WRITING COMMENTS
G7 is an economic and political groups from seven largest developed country, namely Japan, Germany, Italy, France, Canada, United Kingdom, and United States
Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. According to my accounting knowledge, a corporation is not required to have no debt as long as the company able to pay their debts properly. The purpose of having this loan are to fund the projects or purchase of assets so that cash flow from that country going smoothly. The point is that the government uses an optimal debt. If one country has a substantial debt, so many things that need to be noticed, so they can pay their debts. From the macro side, must be ensured that the inflation is not too high, increased export-quality goods, and earn foreign exchange. From the micro side, individuals from these countries must be qualified so it has a high selling value, and from human resource side, the most important thing the government is not corrupt, also fluently to pay tax so as not to slow down the facilities and infrastructure .
One of the biggest problems of one country is debt. It is not easy for the government to pay the debt, especially with the unstable condition. But, with a good budget and a plan is not impossible that government no longer payable. According to IMF economists, to pay a debt that is not too abrupt but its better gradually, so it makes the conditions in the country remains stable.
When I read this articles and analysis, I realized that my country, Indonesia has same problem now. According to my knowledge and experiences from some articles that I read from Indonesia’s newspaper the reason why Indonesia indebted because corruption, inability of the government in allocating funds. Now Indonesian government is trying to pay off debts by reducing expenditure, increase exports, and improve the infrastructure of the development in Indonesia The most important thing is to introduce Indonesia to other countries thus increasing the tourists to come to Indonesia.
Thanks for sharing the article,Nga.
This article states the bad finacial situation of G-7 countries and there are some sugestions for these countires to deal with the crisis.Actually,it is time for gorvement helping the market to regulate
economic activities.They can imitate Franklin Roosevelt’s New Deal during the Depression in U.S from 1929 to 1933. Firstly,the gorvement should creat more jobs by increasing infrastructure investment, that is a fast way to solve the expanding problem of unemployment in G-7
countires,and also this policy will lift the sagging economy.Then,the gorvements should cut the public spending. As far as i know, Greece is going to bankrupt,the most important reason for this disaster is the popularity of corruption in the gorvement of Greece, they waste of the government finance spending unimaginable.Lastly,stop publishing
national debt but paying more attention on how to gain public’s confidence of economy.For example, U.S awalys rely on domestic demand to promote economic growth.However, Americans do not spend their money on shopping anymore when facing this financial crisis.The point is how to gain their confidence back and shopping as before. That is the best way to boost the economy.As we all know,the economy of U.S influences the global economy,if the economy of U.S gets better, i believe that the crisis of G-7 countires will be solved day by day.
When reading this article,i feel glad that China has done well until now after facing this globle crisis.As we all know,China is a socialist country,it is popular to see government intervention
in the economy,so it is more faster for the goverment of China to macro-control the domestic economy.China does not have any debt during these globle economy crisis.
In this article , which is written by Sewell Chan state that high-debts level of the G7 countries (Japan, USA, Germany, UK, France , Italy and Canada).Also International Monetary Fund (IMF) warns prosperous countries which is called G7.Moreover,some of these countries have repeated historical mistakes which is affected now fiscal crisis.In order to resolve this structure deficit ,they should sustain fiscal retrenchment policy.For instance,In my country before retirement age was 40 and it was mistake of the mismanagement of our ex governments,and now it is raised 65.Furthermore,our country is indebted.Because,we are also engage in IMF about the debts.But our new governments prevent about the bad economy policy and it is getting better right now.When he became our government ,he did some critical steps about fiscal changes,like cutting pay raise to the retirement.it was so higher before than now.
G7 represents the seven largest economies in the world. It is one of the important factors controlling the general economy. As my personal opinion, the debt of the G7 countries from different causes urinary: objective and subjective. On objective reasons: yuan being undervalued than the actual value against the dollar, and this has created the competitive advantage of Chinese goods exported to make a trade surplus of country more than 1.3 billion population increase in recent years. According to statistics, in 2009 alone, the trade surplus of China has reached 196.1 billion U.S. dollars. This certainly made for the debts of the G7 countries increased rapidly. Besides, bad debts or other bad debts from other countries can also make the financial situation of the G7 countries are getting worse. That is why the debt of the G7 countries show signs of increasing.
Managing debt is now no longer a matter of the G7 countries, but even with Vietnam – a developing economy, our government is also struggling. For additional capital for investment, debt tends to increase rapidly. Moreover, the average interest rate of government foreign debt also tend to be increased due to Vietnam as a country with low average income. So I think Vietnam should focus on mobilizing domestic capital rather than foreign loans to reduce risk.
by
Ngoc Khanh Luong (Alex)
September 7, 2010 at 3:22 am
Indebted countries do not need to declare default as long as the cash flow still running and their government still be able to prove that they are capable to pay off the debts. I agree with Lianda about “The purpose of having this loan are to fund the projects or purchase of assets so that cash flow from that country going smoothly”. As long as a government desires to develop the country, it needs loans as temporary budgets to benefit the economics. The loan is going to be the ODA (known as official develop assistance), FDI ( Foreign direct investment) from other countries, or issuing government bonds. According to Vivek Kaul, there are debt statuses of some dominant economics such as Japan (with a gross debt of 227% of GDP), Greece (133%), Italy (120%), Belgium (100%), the US (93%), France (84%), Portugal (87%), the UK (78%), and Ireland (78%).” There are many way to go over the deficits and avoid default in order to recover the economics. I give an example for what British government did when they manage their 1945 government’s debts. They ignored the bonds market and persuaded the Treasury to oblige (perhaps the word is force) the banks – some of which are today already in public ownership or part-public ownership – to lend to the Treasury at very low rates of interest. The bankers were not given a choice. Their loans were given a fancy name: “Treasury Deposit Receipts” or TDRs – and they helped to finance the war, as well as post-war economic recovery.
Some raised questions, will countries default or simply printing money?
Countries which owe money in foreign currency cannot print the money to repay the debt, so their chances of default are high if the situation turns really bad. The US has almost all of its government debt — even though more than half of it is owned by foreigners — in dollars. Same is the case with the UK, where almost one-third of government debt is owed by foreigners. So these countries can simply print money and repay their debtors. Of course, that will create a new set of problems, but that’s a risk the governments may be willing to take.” Almost African countries are good example for paying off debts by printing money, they deeply in debts and keep printing money which will no longer consider as money anymore because the exchange rate turn to very high.
Generally, the government should be re-constructed and cut off costs that are consider no longer need for the recover of the country’s economics. Keep the cash flowing by investing in potential projects instead of losing it for risky project like Greece did. Mainly, focus on the field that the country good at. Not only the government keep trying, but also the people of the country need to contribute to the recover of their country. For instance, Japanese used to support their country by strongly use the domestic products
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Huy Dang Duc (Simon)
September 7, 2010 at 3:23 am
First of all, Thanks for Nga. 🙂
I think that this article is appropriate nowadays.
As you know, Korea got into financial trouble in 1999. So we had experienced IMF’s financial guarantee, exactly relief funds. After that time, we have prepared a lot of policies as well as institution and applied to our financial situation.
I think that Korea may be more indebted than others said. So statement below is my opinion based on news interviews and data of research institute which I had worked.
Korean bureaucrats have boasted that the country’s financial status is healthy, citing its low amount of debt ― the government’s obligations of 359.6 trillion won amounted to 33.8 percent of the gross domestic product (GDP) as of the end of last year. In comparison to the average ratio of around 90 percent for member countries of the Organization for Economic Cooperation and Development (OECD), the 33.8 percent, on the surface, seems to be excellent.
However, observers say a closer look into the debts of public corporations reveals totally different snapshots of Asia’s fourth-largest economy, and a case in point is the Korea Land & Housing Corp (LH). LH is now struggling under 181 trillion won in outstanding debt, which has snowballed over the past several years due to the financial crisis and stagnant real estate market.
To keep the state firm afloat, the Seoul administration is considering taking over its debt, which means that the country’s obligations would jump to more than 540 trillion won. Experts predict that other public enterprises would ask for similar measures because most of their debts have been incurred during public campaigns such as the four-river refurbishment scheme.
The president Lee Myung-bak administration plans to funnel a total of 22 trillion won into dredging and restoring four major rivers ― the Han, Nakdong, Geum and Yeongsan. The state-run Korea Water Resources Corp. is spearheading the project.
“The 286 state corporations were 347.6 trillion won in debt last year. Including this amount, Korea’s total debts stands at 66.5 percent of the GDP,’’ a Seoul analyst said, asking not to be named002E “This is comparable to the 54.3 percent of Spain or 77.4 percent of Portugal, nations that have faced crises. In a nutshell, Korea does not have the luxury of bragging any longer about financial health.’’
Standard Chartered First Bank chief economist Oh Suk-tae concurs. “The outstanding debts of the private sector are almost double the GDP. When the economy deteriorates, the government tends to absorb substantial parts of them. Accordingly, public debts only move upward,’’ Oh said. “Public corporations have a lot of debt and as does the private segment. The government must understand that they will have to share the burden for both. In other words, we need to take a different perspective in evaluating the country’s financial status.’’
Meanwhile, public enterprises came under criticism this week as they were found to be contributing little to the economy despite large amounts of assets. According to the Korea Institute of Public Finance, the nation’s state-run companies hold the second-largest assets among the OECD countries at $151 billion as of the end of 2008. Only Japan was higher at $219 billion. The figures were $13.4 billion for the United States and $28.1 billion for the United Kingdom as they did not channel money through public corporations to carry out state projects. Korea had just 184,000 employees working at state-run corporations compared to 1.1 million in the U.S., 899,000 for France, 338,000 for Japan and 285,000 for Italy.
Thanks for the responses of all. They really show your profound knowledge of economics as well as the present situation in your countries. This is also a suitable topic for class discussing, because people can easily find a link to their countries’ economy.
The article reported the meeting of IMF about public debts in wealthiest countries which have heaviest negative effects from the 2008-9 financial crisis. Economists’ cautions are against a too abrupt and excessive reaction, but a calm response. Therefore, a downsizing and maintaining government’s key role to provide equal opportunities for participants should be applied instead of increasing interest rates or declaring to default. These indebted countries’ main problem is structural deficits, so a refinancing crisis with a new loan at a lower interest rate is more persuasive. I totally agree with these solutions in order to help the developed countries get out of debts.
The article also gives me an image about my country Vietnam’s current debts. Vietnam is a developing country with many public debts overestimated.
Vietnam is suffering from a severe inflation rate – 22.97% (2008) – which is estimated to be much higher in 2010 by IMF. The main reasons of this serious circumstance are the exorbitant focus on economic growth rates, trade deficits and ineffective management in government concerns. Among these, major trade deficits come from national public debts. Due to the 2008-9 financial crisis, there was a considerable decrease in national incomes which were chiefly from taxes, public fees, crude oil trading and economic aids; however, except foreign debts. The more national budget deficits Vietnam suffers from, the more debts it has. Tax increase is one of solutions applied. Unreasonable tax for purchasing a car in Vietnam is a clear example. The total percent of all tax kinds is nearly 300%, that means if the manufacturer price of a car is $20,000, it will be approximately $60,000 in Vietnam. Consequently, this weakens consumers’ ability in purchasing. Then, national incomes drop down while debts get bigger. In fact, it reached the number of 47.5% GDP (2009) – which included $25.7 in foreign debts (according to IMF’s researches). These problems happen again and again like a circle haunting the potential development in Vietnam.
Experts candidate that to minimize risks, Vietnamese government should keep the capital flows in import and export under control (to avoid a fake “hot” market), as well as point out ‘which are the real growth rates?’. These solution can help a lot to bring a sustainable development in long-term.
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Diep Dinh (Debbie)
September 7, 2010 at 4:33 am
Bad-debt is a common problem of many countries. This problem can be not solved overnight, especially in this status when economic crisis is spreading over the world with rapid speed. However, in the short term, we should give some resolutions to control increasing such debts. Firstly, G7 should cut down cost for war and stop arm race. Besides, developed countries should spend more money to bailout some big groups which are on the brink. Because if such groups go bankrupt, the problem will become more complex. In my country, the government is facing same problem. Vietnam is also a country has a huge debt. Unlike other countries, most debts of Vietnam have been spent constructing road system and substructure. I think, those debts are been used effectively and it is not serious problem in Vietnam
by
Lizzy (Oanh Nguyen)
September 7, 2010 at 4:36 am
G7 represents the seven largest economies in the world. It is one of the important factors controlling the general economy. As my personal opinion, the debt of the G7 countries from different causes urinary: objective and subjective. On objective reasons: yuan being undervalued than the actual value against the dollar, and this has created the competitive advantage of Chinese goods exported to make a trade surplus of country more than 1.3 billion population increase in recent years. According to statistics, in 2009 alone, the trade surplus of China has reached 196.1 billion U.S. dollars. This certainly made for the debts of the G7 countries increased rapidly. Besides, bad debts or other bad debts from other countries can also make the financial situation of the G7 countries are getting worse. That is why the debt of the G7 countries show signs of increasing.
Managing debt is now no longer a matter of the G7 countries, but even with Vietnam – a developing economy, our government is also struggling. For additional capital for investment, debt tends to increase rapidly. Moreover, the average interest rate of government foreign debt also tend to be increased due to Vietnam as a country with low average income. So I think Vietnam should focus on mobilizing domestic capital rather than foreign loans to reduce risk.
Indebtedness has been always a disputable issue of all time. A high debt level can affect inflation, interest rates and economic growth. As for Viet Nam, the trade deficit has contributed to fragile monetary confidence & become a big challenge for Viet Nam with material & equipment imports accounting for a big ratio. The more the government wants to speed up industrialization & modernization, the heavier the nation depends on imported products. These issues always are left unanswered.
by
Chau Tran Minh Hoang
September 7, 2010 at 5:32 am
Thanks for the responses of all. They really show your profound knowledge of economics as well as the present situation in your countries. This is also a suitable topic for class discussing, because people can easily find a link to their countries’ economy.
The article reported the meeting of IMF about public debts in wealthiest countries which have heaviest negative effects from the 2008-9 financial crisis. Economists’ cautions are against a too abrupt and excessive reaction, but a calm response. Therefore, a downsizing and maintaining government’s key role to provide equal opportunities for participants should be applied instead of increasing interest rates or declaring to default. These indebted countries’ main problem is structural deficits, so a refinancing crisis with a new loan at a lower interest rate is more persuasive. I totally agree with these solutions in order to help the developed countries get out of debts.
The article also gives me an image about my country Vietnam’s current debts. Vietnam is a developing country with many public debts overestimated.
Vietnam is suffering from a severe inflation rate – 22.97% (2008) – which is estimated to be much higher in 2010 by IMF. The main reasons of this serious circumstance are the exorbitant focus on economic growth rates, trade deficits and ineffective management in government concerns. Among these, major trade deficits come from national public debts. Due to the 2008-9 financial crisis, there was a considerable decrease in national incomes which were chiefly from taxes, public fees, crude oil trading and economic aids; however, except foreign debts. The more national budget deficits Vietnam suffers from, the more debts it has. Tax increase is one of solutions applied. Unreasonable tax for purchasing a car in Vietnam is a clear example. The total percent of all tax kinds is nearly 300%, that means if the manufacturer price of a car is $20,000, it will be approximately $60,000 in Vietnam. Consequently, this weakens consumers’ ability in purchasing. Then, national incomes drop down while debts get bigger. In fact, it reached the number of 47.5% GDP (2009) – which included $25.7 in foreign debts (according to IMF’s researches). These problems happen again and again like a circle haunting the potential development in Vietnam.
Experts candidate that to minimize risks, Vietnamese government should keep the capital flows in import and export under control (to avoid a fake “hot” market), as well as point out ‘which are the real growth rates?’. These solution can help a lot to bring a sustainable development in long-term.
by
Diep Dinh (Debbie)
September 7, 2010 at 6:06 am
Thanks for bringing us difficulty in reading this business article.
As far as I think, governments should, already mentioned in the reading, pay insofar as possible when their economy is flourishing in order to reduce their debt. Population aging is a serious problem, increasing public service spend and the number of group unable to work and contribute labor to their country, which will consequently decrease the government’s ability to pay its debt. Directly refuse to pay will result in political isolation and economical collapse.
I also believe that it would not be rational for government to decrease its debt in a steep speed; it will also result in failure. An acceptable way is to pay in a constant speed and reorganize the country’s fiscal structure, such like reducing expense in weapons and firearm development.
China is one of countries which own the largest foreign exchange reserves, and is the biggest creditor of USA. EU and USA are inclined to increase RMB’s (Chinese currency) exchange rate in order to decrease their debt in this way. So I guess China is a debited country. But the economical recession is still a serious problem, especially in foreign trading industry.
My suggestion is, next time, please find an article easy to read!
McDermid ESL Writing & Reading 
The article on the New York Times by Sewell Chan recently mentions three new research papers about the debt level of G7 countries. These papers are written by economists of International Monetary Fund to alert indebted countries about the probability of defaults. As the result of the financial crisis 2008, the wealthiest countries of the world G7 are going to have the serious troubles, the increasing in bad- debts. In the first research paper, two experts Carlo Cotterelli and Andrea Schaechter say that G7 countries should recover their government by cutting public spending, however, without the hasty actions. Moreover, these countries should stay still the main role in basic services and play the role of arbitrators retaining the fairness for all individuals in playing field. The first two authors also state that it is important to keep the interest rate as low as this time because the low interest rate creates good conditions for adjustment the financial situation. In the second paper, another author Jonathan D.Ostry considers another issue, the difference distance countries have before they really touch the defaults. Each country has different process to keep it away from the worst financial situation. Depends on the unsustainable level of finance situation of each countries, some need to correct their historical mistakes immediately by necessary fiscal changes; other can have some more foreign loans. Finally, the last study asserts that the main reason of defaults is not high interest rate; it is the structural deficit. And, the default is not a solution which helps the indebted countries escape from the bad financial status .It is just a step these countries meet on their way to refinance the crisis. Chan, Sewell. (2010, September 1). Monetary fund warns G-7 on Debt levels. Retrieved from http://www.nytimes.com/2010/09/02/business/global/02imf.html?_r=2&ref=business.
International trading is a procedure in which many countries interact with others. Through trading, countries purchase or sell their products and services. The loans and debts are established during this process. Also, because of some political purposes, some countries bail other countries out. Sometimes, the debt is to buy weapon serving for wars. As the result, the loans and debts happen more frequently between countries. Many countries now are suffering the bad-debt that they are unable to pay off. This situation happens to not only the poor countries, but also to developed countries. For example, The USA now is suffering the foreign debt from China and other developed countries such as EU. The USA government couldn’t pay off of easily for all taxpayers so it has to borrow from other governments to temporary fulfill the public demand.
There are some reasons leading to the default of a country. They are the mismanagement in public spending, the involvement in wars, and the neglect paying off debt in the good time of the economies. A famous case about the bankruptcy is Greece which has had a history of financial mismanagement. During the time holding Olympic Athens 2004, Greece spent excessively because its government highly expected that it would receive the profitable return from this international event. Unfortunately, Greece didn’t receive the result as it had expected. The lack of foresight of Greece government translated into a very bad financial situation. And it was official unable to shoulder it debt. Furthermore, there is a fact that the governments of indebted countries haven’t concentrated on solving the public debt even in a good time of developing economies. According to Carlo Cottarelli and Andrea Schaechter, public debt has been rising in bad times but not declining much in good times. (2010, September 1). “Monetary fund warns G-7 on Debt levels”. Obviously, the more the indebted countries neglect solving the debt in the good time, the more heavy debt they incur in the crisis time.
The increase in population’s age is another cause of debt. The increasing in age of population age means more dependent people in a society. The governments are more responsible for paying retired salary, health care services, and other social services. This increase also means the decrease in the number of people who are able to work and contribute to the society. Turns out, public debts becomes the global haunt of many countries.
It is necessary to change this financial situation. Some countries consider defaults the strategy to get out of debts. However, it is not a solution because the indebted countries can’t originally fix their mistakes by defaulting. The mismanagements, the neglects of paying debts, the structure deficits still exist. In the above article, the author summarizes the main ideas of three research papers in order to warn the indebted countries about the dangerous position that they are standing on, and give them some objective recommendations how to get out of debts without being too abrupt, therefore, successfully recover the economies.
Facilitator : Nga Nam Nguyen ( posted September 5, 11.58am)
Dear Nga,
Thank you for an interesting article about G-7 debt levels. Your response showed a good understanding of how to summarize. You also showed analysis (critical thinking) by relating some government spending to political and war purposes. You also connected a current example to the United States’ debt with China and some European Union countries. Your analysis, sometimes, slipped back into summarizing the article, but as a first facilitator with no examples to guide you, I think you did a nice job. To get a conversation started among your colleagues, it may have helped to pose a question for them to ponder and respond to (see facilitator rubric: “pose engaging questions, elicit responses, engage the learners in an activity or task”). You can still do this by adding another comment to our website. Nevertheless, you showed a clear understanding of the article being discussed.
Please feel free to continue the conversation as your colleagues respond. You can continue to facilitate by keeping the discussion focused on the topic, provide structure, and answer questions.
Good job Nga, and thank you.
Thanks so much for your comment Mrs. McDermid.
Here are some questions that people might think of for this topic.
1. What do you think the indebted government should do to recover their financial status.
2. Do you agree with economists that the indebted governments shouldn’t get out of debt without being too abrupt?
3. Think of your country’s financial situation. Is it indebted? and why?
I look forward for your responses . Thank and have nice holiday!
Question 2: Do you agree with IMF economists that the indebted government should get out of debt without being too abrupt? and why?
The article in which is edited by Sewell Chan and published by New York Times, mentioned about the high debts of the G7 Countries.Since the year 1960s the debts of G7 increased and with the help of the 2008-9 financial crisis it reached to the maximum level that International Monetary Fund (IMF) warns the wealthiest countries called G7 ( Japan, USA, Germany, UK, France , Italy and Canada) about control over its high level of debts. In the article there is three authors. These are ; Carlo Cottarelli, who is the director of Fiscal Affairs , Andrea Schaechter who is a senior economist and Jonathan D. Ostry. These authors mentioned about the appropriate solutions in order that G7 countries can get rid of the financial problem of debts and G7 can recover its economics. There are 3 research papers published. In these papers, the fund’s economists offered stern admonitions while cautioning against an overreaction.The messages are collected in one paper on the long run trends in the public finances of the G7 economies.
It is a well known fact that the economic crisis which started in the USA with the mortgage crisis spreaded all over the world. It even affected the wealthiest countries of the world called G7 countries.According to article, Carlo Cottarelli and Andrea Schaechter claim that, G7 can recover its economy by the method of shortage of the public expenditures.Because of the the mismanagement of equilibrium point of their economics. In the past there are several collapses happened in the economy of the countries. For example; The Argentine economic collapse was during the late 1990s and early 2000s. The crisis started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth. In my point of view, similar with the Cottarelli and the Schaechter’s approach , it is a beneficial idea that decrease in Public expenditures contributes G7 countries to recover the economic situation of G7. The increase in the property tax rates , motor vehicle tax to the tax on wealth, such as adding an extra payment processing, bridges and highways to increase fees, increase their contribution to health spending and public spending is cut. For instance; in Turkey, SGK which is same with Social Security Organization in USA worked with the Ministry of Finance and they declared that the examination of participation of the patients is increased. This art entered in to force in October 1, 2009. By the method of examination of the contribution, the needs of persons with non-professional groups of patients, healthcare facilities are needed to prevent the unnecessary usage. In addition to these public expenditures , arbitrary stuffs such as cigarette and alcohol can be taxed with the ratio of 100 % This would contribute to both public health and discourage people to buy. Like the USA did. These two authors also mentioned about the age problem of G7 countries. For me, the old population means not productive population. They are in the consumption group. It means it is a cost for the government and the economy. The reason why I am thinking in this way is, if the retirement age of people in a country is 60, although they do not work, government have to provide them social security which is a debt. Also, their health expenditures are also a cost which is rovided by the government. For example; in Turkey the retirement age is 60. In the recent years this age limit The age limit should be increased according to the countries life standards of living. After retirement, goverment pays these people huge amounts of money that they served the government many years. As logically, they were given enough salary while they were working. They have social securities and covers most of the things like medical operations or treatments. They also do not pay any money to the prescribed medicines because government pays instead of them. For me , if the retirement age is increased from 60 to 70 , the expenditures would decrease. G7 countries are old populated and for me the increase in the retirement age in G7 Countries would help its economic recovery huge amount. They also mentioned about the neccesity of fiscal adjustment and while making these adjustments like downsizing, they should be fair among the individuals. In addition to these the neccesity of downsizing of government for the recovery of debts. Like the companies do in crisis times, they get laid off the workers. According to me governments make downsizing but not dismissing people from the work. They should select the job applicants who are capable of multitasking. In other words, if I were them, I would prefer to take the job applicant who does not only studied Business Administration but also the applicant who also studied International Relations or Advertisement. In other words, instead of paying three different people, I would prefer to pay only one worker who carries a lot of capabilities. We can say 3 in 1. These two authors claimed that although the debts and the budget deficit of G7 countries are high in terms of that the low interest rate application method the debts can be controlled. For me, G7 countries can take loans from emerging countries like Turkey that they can much more lowered the interest rates. The interest rates in Turkey is lower than the other countries. A second IMF paper by Jonathan D. Reily’s claims that public debt between countries differ between what is sustainable and what is not. Some countries like Australia and Norway have little fiscal resposibilities while other countries like Japan have many. I think the public expenditures are mostly correlated with the needs of the public. The only thing to keep these small countries sustainable is if interest rates do not increase from being triggered by negative economic shocks. I think, the main problem of the G7 countries is not the problem of if the interest rates increase or decrease. Their main problem is high level of public debts and it is unneccesary to worry about the interest rates.
In conclusion, in order to reduce the debt levels of G7 countries, Public Expenditures should be minimized, they should make new reforms especially about the retirement policy and health . Not only temporary precautions are taken but also the long term cautions should be formed.
Dear Nihal,
I like your ideas about increasing the retirement age from 60 to 70 years old, taxing alcohol and cigarette up to 100%, educating people with “3 in 1” capabilities.
Thanks for your contribution!
Is the increasing in retirement age from 60 to 70 suitable? I wonder about its real effects. That means people have to work longer while their retirement pensions are cut down? Will they end their career with a dismissal letter because of the considerable decrease in labour productivity at the age from 60 to 70? I think this solution can make the living standard become lower.
Just my opinion (^_^).
Debbie.
Nihal shows a good command of academic English vocabulary, nice job!
In this article, it is stated that International Money Fund warned G-7 countries on their debt levels and advised them by three research articles. According to the article, G-7 Countries increased their spending since the mid-1960s and now they faced record level of debt by help of 2008-2009 financial crisis.
1. What do you think the indebted government should do to recover their financial status.
2. Do you agree with economists that the indebted governments shouldn’t get out of debt without being too abrupt?
3. Think of your country’s financial situation. Is it indebted? and why?
1. The indebted governments like my country should downsize while not preventing itself from playing a key role in the provision of basic services, and in particular in maintaining a level playing field by giving equal opportunities to all individuals regardless of their conditions at birth. They should also continue to keep their interest rates at low level in order to control their debt service payments. Governments like my country should adopt fiscal retrenchment and improve their historical mistakes by taking necessary actions in fiscal policy. They should adopt these policies because otherwise a sustainable economy can turn into unsustainable economy. They should not adopt strategy like defaulting and they should focus on their structural deficits.
2. Yes. This should not be too abrupt. The downsizing of government should not affect of providing of basic services and should maintaine a level playing field by giving equal opportunities to all individuals regardless of their conditions at birth as the article stated. It should be done under control and step by step. Otherwise I think it can create an unsustainable economy.
3. My country is a debited country. It has little space for borrowing and it should adopt fiscal retrenchment policy and improve its historical mistakes by taking necessary actions in fiscal policy. It is indebted because our previous governments made mistakes for managing our fiscal policy and economy. They did not support manufacturing and R&D in my country. Furthermore they could not put an effective policy for public expenditures. People which came to age of 40 became retired so our economy could not feed them. Also foreign investors played many roles for bad economy of my country. Now good fiscal policies are carried out and our economy gets better day by day. People now retire at age of 65 in my country and manufacturing and R&D processes are supported by government. Furthermore, many state-owned firms are customized so our government got rid of those burdens. Many policies like customizing state-owned firms are carried out and today we are still a debited country but much less than we were.
Dear Nga,
Thanks for your instructive summary about the article because I really had difficulty understanding the article itself. Your examples are enlightening for me.
First of all, although I have little knowledge about economics and business, I will try to tell the condition about debts in my country – Turkey. More than 72 million people are living in Turkey and majority of this population is young people. However Turkey can not use this young population for its benefit because of the high unemployment rate. To prevent this unemployment rate and crisis, firstly Turkey needs to bring down the birth rate. Secondly, Turkey needs to apply new employment policies to create new job opportunities to the young population. The upgrowth depends on the imports and it always creates current account deficit. Turkey therefore should improve the production and do exports instead of imports. Turkey also levies high taxes and social security taxes from job providers and this also leads unemployment. Employers should not be faced with higher taxes, they should be encouraged for new business ventures. By this way unemployment may be prevented, and Turkey does not need to provide hugely social service. Although people in Turkey are levied heavy taxes, there is still deficits in Turkey. Since it has to spend more to social services than it takes from taxes. But I do not agree Cottarelli and Schaechter that indebted countries need to downsize their governments because it was tried in Turkey and did not work. Unemployment is already a problem in Turkey so downsizing only makes our situation worse. Instead of downsizing, Turkey should make new investments in the area of biotechnology and nanotechnology. It should give more importance to reseach and development. The agricultural industry in Turkey needs to be improved. Turkey is very underdeveloped about agriculture among other countries. It still does not use machines in agriculture. Briefly to stop its debt, a radical change is necessary for Turkey otherwise it never escapes from going into debt. But I do not know when is the correct time for this radical change to get out of their debted status. Therefore I agree IMF economists that indebted countries should not be too abrupt to change something. There is already a crisis in indebted countries and we do not want another one with a rapid change. Consequently, to cease its debt Turkey should encourage employers for new enterprises. By this way Turkey will use its young population as labor force for its benefit and the working people can pay the taxes of the government. And new working areas will help Turkey to enter the global market more. It will be able to export more and it will not need to import from other countries.
Dear Bengu,
It is good to read your response. To clarify more about this topic,I would like to ask you a question.You said, “Instead of downsizing, Turkey should make new investments in the area of biotechnology and nanotechnology”.Have you ever think of the source from which the Turkey government has fund to invest in biotechnology and nanotechnology? is It another debt?
Yes Nga, Turkey needs to barrow funds from foreign countries to make new investments and to develop its industry. Therefore I called it a radical change. Only in this way it becomes developed and gain a role among the powers of the world in the global market. There are also wealthy employers and entrepreneurs in Turkey that can provide these funds for new enterprises however they face with heavy taxes and lots of procedures instead of being encouraged by the government. I think this would be the only chance for Turkey to go upside. We have lots of natural resources but we are not able to use them correctly because our industry and technology leave behind the other countries.
WRITING COMMENTS
G7 is an economic and political groups from seven largest developed country, namely Japan, Germany, Italy, France, Canada, United Kingdom, and United States
Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. According to my accounting knowledge, a corporation is not required to have no debt as long as the company able to pay their debts properly. The purpose of having this loan are to fund the projects or purchase of assets so that cash flow from that country going smoothly. The point is that the government uses an optimal debt. If one country has a substantial debt, so many things that need to be noticed, so they can pay their debts. From the macro side, must be ensured that the inflation is not too high, increased export-quality goods, and earn foreign exchange. From the micro side, individuals from these countries must be qualified so it has a high selling value, and from human resource side, the most important thing the government is not corrupt, also fluently to pay tax so as not to slow down the facilities and infrastructure .
One of the biggest problems of one country is debt. It is not easy for the government to pay the debt, especially with the unstable condition. But, with a good budget and a plan is not impossible that government no longer payable. According to IMF economists, to pay a debt that is not too abrupt but its better gradually, so it makes the conditions in the country remains stable.
When I read this articles and analysis, I realized that my country, Indonesia has same problem now. According to my knowledge and experiences from some articles that I read from Indonesia’s newspaper the reason why Indonesia indebted because corruption, inability of the government in allocating funds. Now Indonesian government is trying to pay off debts by reducing expenditure, increase exports, and improve the infrastructure of the development in Indonesia The most important thing is to introduce Indonesia to other countries thus increasing the tourists to come to Indonesia.
Dear Lianda,
Thank for your idea about introducing Indonesia to other in order to develop tourism industry!
Personally, I think it is a good solution.
Thanks for sharing the article,Nga.
This article states the bad finacial situation of G-7 countries and there are some sugestions for these countires to deal with the crisis.Actually,it is time for gorvement helping the market to regulate
economic activities.They can imitate Franklin Roosevelt’s New Deal during the Depression in U.S from 1929 to 1933. Firstly,the gorvement should creat more jobs by increasing infrastructure investment, that is a fast way to solve the expanding problem of unemployment in G-7
countires,and also this policy will lift the sagging economy.Then,the gorvements should cut the public spending. As far as i know, Greece is going to bankrupt,the most important reason for this disaster is the popularity of corruption in the gorvement of Greece, they waste of the government finance spending unimaginable.Lastly,stop publishing
national debt but paying more attention on how to gain public’s confidence of economy.For example, U.S awalys rely on domestic demand to promote economic growth.However, Americans do not spend their money on shopping anymore when facing this financial crisis.The point is how to gain their confidence back and shopping as before. That is the best way to boost the economy.As we all know,the economy of U.S influences the global economy,if the economy of U.S gets better, i believe that the crisis of G-7 countires will be solved day by day.
When reading this article,i feel glad that China has done well until now after facing this globle crisis.As we all know,China is a socialist country,it is popular to see government intervention
in the economy,so it is more faster for the goverment of China to macro-control the domestic economy.China does not have any debt during these globle economy crisis.
In this article , which is written by Sewell Chan state that high-debts level of the G7 countries (Japan, USA, Germany, UK, France , Italy and Canada).Also International Monetary Fund (IMF) warns prosperous countries which is called G7.Moreover,some of these countries have repeated historical mistakes which is affected now fiscal crisis.In order to resolve this structure deficit ,they should sustain fiscal retrenchment policy.For instance,In my country before retirement age was 40 and it was mistake of the mismanagement of our ex governments,and now it is raised 65.Furthermore,our country is indebted.Because,we are also engage in IMF about the debts.But our new governments prevent about the bad economy policy and it is getting better right now.When he became our government ,he did some critical steps about fiscal changes,like cutting pay raise to the retirement.it was so higher before than now.
G7 represents the seven largest economies in the world. It is one of the important factors controlling the general economy. As my personal opinion, the debt of the G7 countries from different causes urinary: objective and subjective. On objective reasons: yuan being undervalued than the actual value against the dollar, and this has created the competitive advantage of Chinese goods exported to make a trade surplus of country more than 1.3 billion population increase in recent years. According to statistics, in 2009 alone, the trade surplus of China has reached 196.1 billion U.S. dollars. This certainly made for the debts of the G7 countries increased rapidly. Besides, bad debts or other bad debts from other countries can also make the financial situation of the G7 countries are getting worse. That is why the debt of the G7 countries show signs of increasing.
Managing debt is now no longer a matter of the G7 countries, but even with Vietnam – a developing economy, our government is also struggling. For additional capital for investment, debt tends to increase rapidly. Moreover, the average interest rate of government foreign debt also tend to be increased due to Vietnam as a country with low average income. So I think Vietnam should focus on mobilizing domestic capital rather than foreign loans to reduce risk.
Indebted countries do not need to declare default as long as the cash flow still running and their government still be able to prove that they are capable to pay off the debts. I agree with Lianda about “The purpose of having this loan are to fund the projects or purchase of assets so that cash flow from that country going smoothly”. As long as a government desires to develop the country, it needs loans as temporary budgets to benefit the economics. The loan is going to be the ODA (known as official develop assistance), FDI ( Foreign direct investment) from other countries, or issuing government bonds. According to Vivek Kaul, there are debt statuses of some dominant economics such as Japan (with a gross debt of 227% of GDP), Greece (133%), Italy (120%), Belgium (100%), the US (93%), France (84%), Portugal (87%), the UK (78%), and Ireland (78%).” There are many way to go over the deficits and avoid default in order to recover the economics. I give an example for what British government did when they manage their 1945 government’s debts. They ignored the bonds market and persuaded the Treasury to oblige (perhaps the word is force) the banks – some of which are today already in public ownership or part-public ownership – to lend to the Treasury at very low rates of interest. The bankers were not given a choice. Their loans were given a fancy name: “Treasury Deposit Receipts” or TDRs – and they helped to finance the war, as well as post-war economic recovery.
Some raised questions, will countries default or simply printing money?
Countries which owe money in foreign currency cannot print the money to repay the debt, so their chances of default are high if the situation turns really bad. The US has almost all of its government debt — even though more than half of it is owned by foreigners — in dollars. Same is the case with the UK, where almost one-third of government debt is owed by foreigners. So these countries can simply print money and repay their debtors. Of course, that will create a new set of problems, but that’s a risk the governments may be willing to take.” Almost African countries are good example for paying off debts by printing money, they deeply in debts and keep printing money which will no longer consider as money anymore because the exchange rate turn to very high.
Generally, the government should be re-constructed and cut off costs that are consider no longer need for the recover of the country’s economics. Keep the cash flowing by investing in potential projects instead of losing it for risky project like Greece did. Mainly, focus on the field that the country good at. Not only the government keep trying, but also the people of the country need to contribute to the recover of their country. For instance, Japanese used to support their country by strongly use the domestic products
First of all, Thanks for Nga. 🙂
I think that this article is appropriate nowadays.
As you know, Korea got into financial trouble in 1999. So we had experienced IMF’s financial guarantee, exactly relief funds. After that time, we have prepared a lot of policies as well as institution and applied to our financial situation.
I think that Korea may be more indebted than others said. So statement below is my opinion based on news interviews and data of research institute which I had worked.
Korean bureaucrats have boasted that the country’s financial status is healthy, citing its low amount of debt ― the government’s obligations of 359.6 trillion won amounted to 33.8 percent of the gross domestic product (GDP) as of the end of last year. In comparison to the average ratio of around 90 percent for member countries of the Organization for Economic Cooperation and Development (OECD), the 33.8 percent, on the surface, seems to be excellent.
However, observers say a closer look into the debts of public corporations reveals totally different snapshots of Asia’s fourth-largest economy, and a case in point is the Korea Land & Housing Corp (LH). LH is now struggling under 181 trillion won in outstanding debt, which has snowballed over the past several years due to the financial crisis and stagnant real estate market.
To keep the state firm afloat, the Seoul administration is considering taking over its debt, which means that the country’s obligations would jump to more than 540 trillion won. Experts predict that other public enterprises would ask for similar measures because most of their debts have been incurred during public campaigns such as the four-river refurbishment scheme.
The president Lee Myung-bak administration plans to funnel a total of 22 trillion won into dredging and restoring four major rivers ― the Han, Nakdong, Geum and Yeongsan. The state-run Korea Water Resources Corp. is spearheading the project.
“The 286 state corporations were 347.6 trillion won in debt last year. Including this amount, Korea’s total debts stands at 66.5 percent of the GDP,’’ a Seoul analyst said, asking not to be named002E “This is comparable to the 54.3 percent of Spain or 77.4 percent of Portugal, nations that have faced crises. In a nutshell, Korea does not have the luxury of bragging any longer about financial health.’’
Standard Chartered First Bank chief economist Oh Suk-tae concurs. “The outstanding debts of the private sector are almost double the GDP. When the economy deteriorates, the government tends to absorb substantial parts of them. Accordingly, public debts only move upward,’’ Oh said. “Public corporations have a lot of debt and as does the private segment. The government must understand that they will have to share the burden for both. In other words, we need to take a different perspective in evaluating the country’s financial status.’’
Meanwhile, public enterprises came under criticism this week as they were found to be contributing little to the economy despite large amounts of assets. According to the Korea Institute of Public Finance, the nation’s state-run companies hold the second-largest assets among the OECD countries at $151 billion as of the end of 2008. Only Japan was higher at $219 billion. The figures were $13.4 billion for the United States and $28.1 billion for the United Kingdom as they did not channel money through public corporations to carry out state projects. Korea had just 184,000 employees working at state-run corporations compared to 1.1 million in the U.S., 899,000 for France, 338,000 for Japan and 285,000 for Italy.
Thanks for the responses of all. They really show your profound knowledge of economics as well as the present situation in your countries. This is also a suitable topic for class discussing, because people can easily find a link to their countries’ economy.
The article reported the meeting of IMF about public debts in wealthiest countries which have heaviest negative effects from the 2008-9 financial crisis. Economists’ cautions are against a too abrupt and excessive reaction, but a calm response. Therefore, a downsizing and maintaining government’s key role to provide equal opportunities for participants should be applied instead of increasing interest rates or declaring to default. These indebted countries’ main problem is structural deficits, so a refinancing crisis with a new loan at a lower interest rate is more persuasive. I totally agree with these solutions in order to help the developed countries get out of debts.
The article also gives me an image about my country Vietnam’s current debts. Vietnam is a developing country with many public debts overestimated.
Vietnam is suffering from a severe inflation rate – 22.97% (2008) – which is estimated to be much higher in 2010 by IMF. The main reasons of this serious circumstance are the exorbitant focus on economic growth rates, trade deficits and ineffective management in government concerns. Among these, major trade deficits come from national public debts. Due to the 2008-9 financial crisis, there was a considerable decrease in national incomes which were chiefly from taxes, public fees, crude oil trading and economic aids; however, except foreign debts. The more national budget deficits Vietnam suffers from, the more debts it has. Tax increase is one of solutions applied. Unreasonable tax for purchasing a car in Vietnam is a clear example. The total percent of all tax kinds is nearly 300%, that means if the manufacturer price of a car is $20,000, it will be approximately $60,000 in Vietnam. Consequently, this weakens consumers’ ability in purchasing. Then, national incomes drop down while debts get bigger. In fact, it reached the number of 47.5% GDP (2009) – which included $25.7 in foreign debts (according to IMF’s researches). These problems happen again and again like a circle haunting the potential development in Vietnam.
Experts candidate that to minimize risks, Vietnamese government should keep the capital flows in import and export under control (to avoid a fake “hot” market), as well as point out ‘which are the real growth rates?’. These solution can help a lot to bring a sustainable development in long-term.
Bad-debt is a common problem of many countries. This problem can be not solved overnight, especially in this status when economic crisis is spreading over the world with rapid speed. However, in the short term, we should give some resolutions to control increasing such debts. Firstly, G7 should cut down cost for war and stop arm race. Besides, developed countries should spend more money to bailout some big groups which are on the brink. Because if such groups go bankrupt, the problem will become more complex. In my country, the government is facing same problem. Vietnam is also a country has a huge debt. Unlike other countries, most debts of Vietnam have been spent constructing road system and substructure. I think, those debts are been used effectively and it is not serious problem in Vietnam
G7 represents the seven largest economies in the world. It is one of the important factors controlling the general economy. As my personal opinion, the debt of the G7 countries from different causes urinary: objective and subjective. On objective reasons: yuan being undervalued than the actual value against the dollar, and this has created the competitive advantage of Chinese goods exported to make a trade surplus of country more than 1.3 billion population increase in recent years. According to statistics, in 2009 alone, the trade surplus of China has reached 196.1 billion U.S. dollars. This certainly made for the debts of the G7 countries increased rapidly. Besides, bad debts or other bad debts from other countries can also make the financial situation of the G7 countries are getting worse. That is why the debt of the G7 countries show signs of increasing.
Managing debt is now no longer a matter of the G7 countries, but even with Vietnam – a developing economy, our government is also struggling. For additional capital for investment, debt tends to increase rapidly. Moreover, the average interest rate of government foreign debt also tend to be increased due to Vietnam as a country with low average income. So I think Vietnam should focus on mobilizing domestic capital rather than foreign loans to reduce risk.
Indebtedness has been always a disputable issue of all time. A high debt level can affect inflation, interest rates and economic growth. As for Viet Nam, the trade deficit has contributed to fragile monetary confidence & become a big challenge for Viet Nam with material & equipment imports accounting for a big ratio. The more the government wants to speed up industrialization & modernization, the heavier the nation depends on imported products. These issues always are left unanswered.
Thanks for the responses of all. They really show your profound knowledge of economics as well as the present situation in your countries. This is also a suitable topic for class discussing, because people can easily find a link to their countries’ economy.
The article reported the meeting of IMF about public debts in wealthiest countries which have heaviest negative effects from the 2008-9 financial crisis. Economists’ cautions are against a too abrupt and excessive reaction, but a calm response. Therefore, a downsizing and maintaining government’s key role to provide equal opportunities for participants should be applied instead of increasing interest rates or declaring to default. These indebted countries’ main problem is structural deficits, so a refinancing crisis with a new loan at a lower interest rate is more persuasive. I totally agree with these solutions in order to help the developed countries get out of debts.
The article also gives me an image about my country Vietnam’s current debts. Vietnam is a developing country with many public debts overestimated.
Vietnam is suffering from a severe inflation rate – 22.97% (2008) – which is estimated to be much higher in 2010 by IMF. The main reasons of this serious circumstance are the exorbitant focus on economic growth rates, trade deficits and ineffective management in government concerns. Among these, major trade deficits come from national public debts. Due to the 2008-9 financial crisis, there was a considerable decrease in national incomes which were chiefly from taxes, public fees, crude oil trading and economic aids; however, except foreign debts. The more national budget deficits Vietnam suffers from, the more debts it has. Tax increase is one of solutions applied. Unreasonable tax for purchasing a car in Vietnam is a clear example. The total percent of all tax kinds is nearly 300%, that means if the manufacturer price of a car is $20,000, it will be approximately $60,000 in Vietnam. Consequently, this weakens consumers’ ability in purchasing. Then, national incomes drop down while debts get bigger. In fact, it reached the number of 47.5% GDP (2009) – which included $25.7 in foreign debts (according to IMF’s researches). These problems happen again and again like a circle haunting the potential development in Vietnam.
Experts candidate that to minimize risks, Vietnamese government should keep the capital flows in import and export under control (to avoid a fake “hot” market), as well as point out ‘which are the real growth rates?’. These solution can help a lot to bring a sustainable development in long-term.
Thanks for bringing us difficulty in reading this business article.
As far as I think, governments should, already mentioned in the reading, pay insofar as possible when their economy is flourishing in order to reduce their debt. Population aging is a serious problem, increasing public service spend and the number of group unable to work and contribute labor to their country, which will consequently decrease the government’s ability to pay its debt. Directly refuse to pay will result in political isolation and economical collapse.
I also believe that it would not be rational for government to decrease its debt in a steep speed; it will also result in failure. An acceptable way is to pay in a constant speed and reorganize the country’s fiscal structure, such like reducing expense in weapons and firearm development.
China is one of countries which own the largest foreign exchange reserves, and is the biggest creditor of USA. EU and USA are inclined to increase RMB’s (Chinese currency) exchange rate in order to decrease their debt in this way. So I guess China is a debited country. But the economical recession is still a serious problem, especially in foreign trading industry.
My suggestion is, next time, please find an article easy to read!