Friday, July 4, 2014

Debt vultures endanger the world

by Nouriel Roubini, July 04 2014,

LIKE individuals, corporations and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction.
But the continuing legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken.
Individuals, firms, or governments may end up with too much debt because of bad luck, bad decisions, or a combination.
If you get a mortgage but then lose your job, you have bad luck.
If your debt becomes unsustainable because you borrowed too much to take long vacations or buy expensive appliances, your bad behaviour is to blame.
The same applies to corporate firms: some have bad luck and their business plans fail, while others borrow too much to pay their mediocre managers excessively.
Bad luck and bad behaviour (policies) can also lead to unsustainable debt burdens for governments. If a country’s terms of trade (the prices of its exports) deteriorate and a recession persists for a long time, the government’s revenue base may shrink and its debt burden may become excessive.
But an unsustainable debt burden may also result from borrowing to spend too much, failure to collect sufficient taxes, and other policies that undermine the economy’s growth potential.

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Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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