A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown).

Prior to the crisis, banks had often been net sellers of foreign government bonds, but they significantly increased their purchases during 2008 2009. With the onset of the European sovereign debt crisis in 2010, banks appetite for public debt fell again.

Initially a financial crisis, it morphed into a classic public debt crisis after governments stepped in to guarantee banks obligations. That, in turn, has created a new set of worries for banks that are over exposed to supposedly secure government debt.

I. China's growing housing debt crisis

Macroeconomic policy questions external debt crisis

The European Union s approach to bank regulation encouraged financial institutions to load up on government debt supposedly a risk free asset. Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.

59 223. External debt crisis and development

60 187. External debt crisis and development

61 188. External debt crisis and development

58 203. External debt crisis and development

58 203 External debt crisis and development

58 203 External debt crisis and development

This is how the Latin American debt crisis of the 1980s, the Mexican Tequila crisis of 1994, the Asian debt crisis of 1997, and the Russian crisis of 1998 unfolded. It was also how the financial crisis of 2008 2009 transmitted itself to emerging markets.

(c) External debt crisis and development (A 60 139)

As for Chinese banks, the main problem appears to be exposure to ballooning local government debt, which, according to the government, totaled 1.7 trillion (roughly 30 of GDP) at the end of 2010. Approximately half of this debt was on their books prior to the crisis.

2. Why is the housing debt crisis the most serious problem?

It has been two decades since the last global debt crisis.

The cost is also the increase in net federal government debt held by the private sector the most accurate measure of true government indebtedness. Comparing the US Congressional Budget Office s medium term forecasts before (in January 2008) and after the crisis, this debt increase is a staggering 40 of GDP.

This distinction between foreign and domestic debt is particularly important in the context of the euro crisis, because eurozone countries cannot devalue to increase exports if this is required to service foreign debt. And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.

A public debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt GDP ratio).

If such a contingent capital structure had been in place before the crisis, troubled banks would have been recapitalized by the contingent debt holders while avoiding the complications and legal posturing inevitable in formal bankruptcy. Debt investors, not the government, would have bailed out the banks, making the financial crisis substantially smaller, if it had occurred at all.

Above all, any realistic strategy for dealing with the eurozone crisis must involve massive write downs (forgiveness) of peripheral countries debt. These countries massive combined bank and government debt the distinction everywhere in Europe has become blurred makes rapid sustained growth a dream.

Both are cases of severe economic crisis, to be sure. But the eurozone s problems stem from high levels of government debt, while South Korea faced massive capital flight and a collapsing currency and almost all of the debt was in the corporate sector.

To do the same thing with bank debt could pull hitherto sound economies into the abyss, because bank s balance sheets are much larger than the volume of government debt. In Spain, the public debt to GDP ratio is 69 , but the debt of the Spanish banking system totals 305 of GDP, or about 3.3 trillion about as much as the combined public debt of all five crisis stricken eurozone countries.

In some countries Argentina, Ecuador and the Russian Federation the debt crisis led to a suspension of payments or defaults on debt service.

The question of debt sustainability analysis is also key to the resolution of the debt crisis of other low and middle income countries.

Another major risk of interest rate liberalization in China stems from rising public debt, particularly local government debt, which has grown significantly in the wake of the global financial crisis. A key parameter for determining the long run sustainability of public debt is the gap between interest rates and the nominal GDP growth rate.

Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt. Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.

Some countries achieved a real exit from a debt crisis, while others continued to face a lingering debt problem or are considering new debt renegotiations (as in the case of Ecuador).

And Greece s profligacy was epic. In the run up to its debt crisis in 2010, the government s primary budget deficit (the amount by which government expenditure on goods and services exceeds revenues, excluding interest payments on its debt) was equivalent to an astonishing 10 of national income.

The debt crisis continues to rage in many countries in Asia, Latin America and Africa.

Overcoming Puerto Rico s crisis will require restoring growth, implementing a sustainable fiscal policy, and debt restructuring. Accomplishing the first of these would, together with reduction of excessive government expenditures, help to achieve the second.

In addition, given that local government debt comprises 27 of China s 2010 GDP, while central government debt and policy loans stand at 20 and 6 of GDP, respectively, the total public debt to GDP ratio is approximately 53 lower than Germany s. So, while China should not be complacent about local government debt, panic is unwarranted.

We are, however, concerned that many African countries remain burdened by debt, and we call for urgent measures to address the debt crisis of those countries.

If a debt crisis results from government profligacy and mismanagement, rather than from a market failure, it is true that the central bank should not intervene. If, however, the crisis results from a coordination failure among investors when each investor refuses to roll over the government s debt for fear that others will do the same, leading to a default monetary policy can play an important role.

Indeed, only those countries that were running large current account deficits before the crisis were affected by it. The case of Belgium is particularly instructive, because the risk premium on Belgian sovereign debt has remained modest throughout most of the euro crisis, although the country s debt GDP ratio is above the eurozone average, at around 100 , and it went without a government for more than a year.

Recalling its resolution 58 203 of 23 December 2003 on the external debt crisis and development,

(c) External debt crisis and development (continued) (A C.2 60 L.3 and L.51)

See report of the Secretary General entitled External debt crisis and development (A 59 219), paras.

(c) External debt crisis and development report of the Second Committee (A 60 486 Add.3)

Canada has been restructuring government spending to reduce its debt.

CLAREMONT, CALIFORNIA The debt crisis in Europe is no longer a European affair. Coupled with fears of a double dip recession in the United States, the European debt crisis is dragging the global economy into another cycle of financial panic and economic recession.

In Lebanon, persisting high levels of public debt forced the Government to direct much of its expenditure towards debt service.

The demand for debt repayment confronts the philosophy of debt forgiveness. In the lender s view, the 17 interest rate that Greece s government now has to pay for its 10 year bonds accurately reflects the lender s risk in buying Greek government debt.

Second, China s fiscal position will worsen rapidly because of massive local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country.