Is Greece in a debt trap?
There has been much talk in recent weeks about whether Greece is about to fall into a classic âdebt trapâ. Two conditions need to be met for that to happen: The rate of interest on sovereign debt must be higher than the growth rate of the economy, and there must be a persistent deficit on the primary budget balance. Chart 3 below illustrates those dynamics. The last place you want to be on that chart is in the lower right corner (where you find Ireland).
Chart 2: Government Debt Held by Foreigners
Source: âAvoiding the Sovereign Avalancheâ, Citigroup Global Markets, May 2010
Chart 3: Government borrowings vs. interest-to-growth differential
Source: âSovereign Debt: A Structural Crisis and its Implications for Growthâ, UBS, 11th May 2010
It should be blatantly clear from this chart that Greece is by no means the only country at risk of falling into the much dreaded debt trap. The United Kingdom, the United States, New Zealand, Spain, France, Portugal and Australia are all in dangerous territory and Ireland is in very deep trouble on this account.
