Easy come, easy go? With debt, not necessarily so (Feature)

By Niels C Sorrells Apr 20, 2010, 6:06 GMT

Berlin - The party, it would seem, is over. Worse yet, most of the partygoers were out of cash when it came time to pay the bill.

If nothing else, the last few years have taught broad swaths of Westerners some truths that their grandparents might have held for self-evident. A house is not a line of credit; a credit card is not the same as cash; and bills cannot be deferred indefinitely.

Perhaps worse - we're not done yet. Even as private borrowers have retreated from mortgages and credit card debt in the US and Western Europe (only to be replaced by new credit card seekers in some emerging countries), national governments have gone even deeper into debt, hoping to borrow enough money to boost lagging economies.

And recent weeks have shown that, even with a country as financially troubled as Greece, investors are still willing to take a chance and lend it money ... provided that the country provides a high enough interest rate for the lender's troubles.

In short, the rich world has become the borrowing world and the emerging world has become the lending world. If nothing else, this ensures that some things are going to have to change in the near future.

'The required adjustment is formidable,' said International Monetary Fund Director Dominique Strauss-Kahn in an April 10 speech.

'Public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 per cent of GDP (gross domestic product) in 2014. Reversing this increase will be a tremendous challenge - let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises.'

His opinions are fairly universal.

'Trying to pay down some of the debt we've amassed while trying to have somewhat reasonable growth prospects - the two things don't sit happily with one another,' said Marc Ostwald, a market analyst with Monument Securities in London.

'If we're going to pay down the debt, we have to pay more taxes. We're still trying to have strong growth.

'We accumulated a lot of debt at the same time, initially at the customer level, now at the government level. We're beginning to realize that all of it doesn't add up to a picture that equals reasonable growth if we're going to borrow less and get our books in order.'

The most commonly recommended cure-all is rebalancing. Countries that splurged too much (think Britain, Greece and the US) are going to have to learn to live within their means while countries sitting on huge stockpiles of savings (think China and Germany) are going to have to consume more.

Only then will some of the money trapped in the savers' bank account be released back into markets, hopefully buying up some of the wares offered up by the debtors, in turn helping them to pay off their debts.

That, at least is the theory. Whether it will be possible to convince Americans to give up their spending or Germans to give up their savings is an entirely different question.

Some are pessimistic. 'There's a huge problem here. They won't change,' says Felix Roth, a research fellow with the economic policy unit at the Centre for European Policy Studies.

Event the optimists are only slightly less pessimistic, noting that the only way to fix the situation is to rebalance, arguing that world leaders will have to figure out the solution before global growth stagnates.

After all, notes Sotiria Theodoropoulou, a policy analyst at the European Policy Centre, 'if recovery does not pick up, then the exports of the emerging countries will also suffer.'

Until then, the world will have to muddle through. Ongoing adjustments in the US, Greece and Britain - everything from foreclosed homes to massive slashes in government benefits -highlight what may lie ahead as nations learn to deal with life on a reduced budget.

But what is also clear is that there are multiple ways to deal with the debt. Argentina defaulted on its debt earlier this century. Japan has some of the highest debt levels in the world, but has largely borrowed from its own citizens, keeping it from falling at the mercy of foreign creditors.

Meanwhile, other countries are just starting to learn about the dangers of credit and debt, hinting that the whole cycle could be primed to start over again someday. In which case, most would argue, it's best to learn some lessons now, to be better prepared for the next crisis.