Debt Crisis
It seems like four years ago that we saw the first warnings of an emerging debt crisis. In the United States, there was a growing trend of borrowers defaulting on their mortgages, within what was called the sub-prime lending market. The debt contagion spread, at first slowly, but then with a vengeance as the banks began to be hit, including a list of famous names.
Some of the key economies have been coming out of recession, showing modest growth but now we find ourselves in a sovereign debt crisis. This is where entire countries are declared insolvent through an inability to pay their debts. Although it was possible to stage a rescue attempt with Greece, there are other much larger European economies such as Italy and Spain. Their issues are more difficult to address. They are bigger beasts to bail out.
Britain has not joined the Euro and this has been a matter of hot political debate. Many of those people opposed to joining, including myself, feel able to say that the reasoning for this is now all too apparent. While there is a degree of collective economic responsibility across Europe, many of us do not wish to race to bail out the single European currency.
The whole problem of sovereign debt is a vicious circle. A country’s credit rating is reduced so its borrowing costs go up. This increases the challenge of paying the debt and could lead to a further credit downgrade. Incredibly, we have seen the United States assigned a credit rating of ‘AA+’, down from ‘AAA’, the status still enjoyed by Britain. This reflects the huge American debt, running into trillions of dollars, and the implicit opinion of the credit rating agency that more could be done to reduce the borrowing levels.
There are so many lessons here. Clearly banks and other lending institutions forgot the meaning of risk some years ago. They lent against inadequate security and on ridiculous income multiples. Then there are the long-term errors of governments.
Politicians like to be liked but should not wish to pay any price in pursuit of this fleeting goal. One way to be liked short-term is to increase public spending in an unsustainable way, which might mean drawing on reserves for example. Of course a given reserve can be used only once and from on then on it might be necessary to borrow money to sustain the spending commitment.
That is the problem – countries living beyond their means to secure short-term bliss and electoral endorsement. It can never last and ultimately there is a high price to pay. We can only hope that politicians might learn from this episode and curb their appetite for excessive borrowing in the future.
Councillor Bob Lanzer, Leader of Crawley Borough Council
9th August 2011