So countries have debts amounting to 120% of GDP etc...

[Mich the Tester]

I could hold a political rant about governments running up debts, but I really question whether this is just artificial panic whipped up by speculators.

If a country like Italy, which is the latest subject of panic, has debts of 119% of gdp, is that really a problem? Given that those debts were incurred while Italy had a good credit rating, that would mean they're required to spend about 7 and a half percent of GDP on interest payments. OK, so really you'd be better off spending that on education, infrastructure and other nice things, but nevertheless; is this really a problem? Most homeowner households have a mortgage of about 300% to 400% of household income, taken out at higher interest rates than developed country governments, and yet most service the interest without problems. Many businesses or business owners are 'leveraged' to much more than twice their turnover, but continue to be profitable. Governments own a tremendous amount of assets, like land, valuable buildings, art collections, vehicles, ships, hairyplanes, large businesses and bonds issued by other governments including those with good credit ratings. Some of those assets could be sold to pay off debts.

So why the panic?

Am I the only one who suspects this panic is actually being whipped up to a large extent by those who are speculating on other things like gold, Credit Default Swaps or Asian economies/currencies?

[centurian]

The difference is that homeowners taking out a mortgage have the disposable income to make the payments, or they should have.

Governments on the other hand, are currently borrowing to keep the lights on. Greece would love to default, but they can't because it means turning of the lights of government.

All this is akin to taking out a loan to pay the gas/electricity bill, although given how prices keep climbing, that's less of an exaggeration than it used to be.

Even if governments are borrowing to "invest", the problem is that governments need to always keep investing in something - as there are so many infrastructure projects, so there's always something that needs outdated.

[Mich the Tester]

The difference is that homeowners taking out a mortgage have the disposable income to make the payments, or they should have.

Governments on the other hand, are currently borrowing to keep the lights on. Greece would love to default, but they can't because it means turning of the lights of government.

And this come back to my point that some southern European governments could actually stop spending money on some things, like much of their military spending, coastal/border guarding and immigration controls (which mainly benefit northern Europe) and EU contributions. They could save a lot of money that way which would help in servicing the debts. Of course, northern Europe would rather they didn't stop spending on those things, which puts the southern Europeans in a rather nice position; give us a load of money or we'll bankrupt the lot of you and let the starving millions into Europe.

Maybe it's not a bad idea to give the Italians and the Greeks a hand right now.

[Freamon]

The problem is that once a country's debts exceed a certain percentage of GDP, it's pretty much impossible for them to ever reduce those debts in real terms, as tax revenue cannot rise fast enough to cover debt repayments to a level that would reduce debt as a percentage of GDP. This is a "tipping point", beyond which lies a death spiral that guarantees eventual default in some shape or form (even if it's decades away). There's some debate as to how far Italy, Greece, Ireland, Portugal, Spain, UK etc are from this tipping point (it's not the same country by country, e.g. Japan has huge debt per GDP but most of it is held by internal savers) but a consensus is forming that they're not far off it.

[Mich the Tester]

The problem is that once a country's debts exceed a certain percentage of GDP, it's pretty much impossible for them to ever reduce those debts in real terms, as tax revenue cannot rise fast enough to cover debt repayments to a level that would reduce debt as a percentage of GDP. This is a "tipping point", beyond which lies a death spiral that guarantees eventual default in some shape or form (even if it's decades away). There's some debate as to how far Italy, Greece, Ireland, Portugal, Spain, UK etc are from this tipping point (it's not the same country by country, e.g. Japan has huge debt per GDP but most of it is held by internal savers) but a consensus is forming that they're not far off it.

Yep, so we all agree that they need to sort out their budgets, but is this really cause for panic?

[Fred Bloggs]

I stuggle to understand why Italy is in trouble really. Unlike the UK, Italy still has a huge manufacturing sector that creates real wealth. I can understand why shuffling money around in the UK has got us into a mess financially (essentially there is no creation of real wealth) but Italy has far more in common with Germany or France as far as wealth creation goes.

[milanbenes]

I stuggle to understand why Italy is in trouble really. Unlike the UK, Italy still has a huge manufacturing sector that creates real wealth. I can understand why shuffling money around in the UK has got us into a mess financially (essentially there is no creation of real wealth) but Italy has far more in common with Germany or France as far as wealth creation goes.

agreed,

hence my conclusion this is simply a continuation of the soap opera to keep the peasants amused and in line

Milan.

[TimberWolf]

Have a play with this graph. With events evolving rapidly it's a bit behind the times unfortunately, with the UK's debt still showing 80% of GDP.

Interestingly Italy's dept/gdp has hardly changed over the last 15 years. Ours (UK) pitched up in 1997. Some of the poorer European countries (Estonia, Bulgaria) have hardly any, while Ireland's is heading for the Moon and Iceland's disappeared in 2009. Turkey's is going in the opposite direction, as is Bulgaria's.

[gingerjedi]

What does Italy make that can't be made cheaper elsewhere? It may be a rocky road but we're right to go high tech and invest in Pharma, Aerospace and such like.

Germany didn't get stinking rich by selling BMW's.

[Mich the Tester]

I stuggle to understand why Italy is in trouble really. Unlike the UK, Italy still has a huge manufacturing sector that creates real wealth. I can understand why shuffling money around in the UK has got us into a mess financially (essentially there is no creation of real wealth) but Italy has far more in common with Germany or France as far as wealth creation goes.

Italy has a problem with politics and corruption, especially in the south, but as you point out, it also has a strong industry and lots of very good profitable businesses.