2015 June 08 Monday
IMF Thinks Greece Debt Load Too High

The biggest surprise in an NY Times article about the Greek debt negotiations is that the IMF thinks Europe needs to take a big loss on its loans to Greece because the current Greek debt load is 180% of Greek GDP and this is just not sustainable. But the Europeans won't cut the debt load.

It was irresponsible for the Europeans to lend so much money to the Greek government in the first place. It takes two to tango.

This reminds me: back during the Reagan Administration the US deficit went up sharply. This was blamed at the time on Reagan tax cuts and defense spending. But J.W. Mason says most of the spike was due to high borrowing costs due to Fed chair Paul Volcker's hiking up the interest rate.

While the overall deficit was about 4.5 points higher under Reagan compared with the average of the 1960s and 1970s, the primary deficit was only 1.4 points higher. So over two-thirds of the increase in deficits was higher interest spending. For that, we can blame Paul Volcker (a Carter appointee), not Ronald Reagan.

Why does that matter? The US government has a much higher level of debt relative to GDP than it did in the 1980s. If interest rates were to rise sharply the US would face its own debt crisis.

Share |      By Randall Parker at 2015 June 08 10:42 PM 


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