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S&P: 60% of countries will be bankrupt within 50 years

By Daniel Tencer
Saturday, October 9, 2010 21:26 EDT
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Predicts US will have a debt of 415% of GDP by 2050

Some sixty percent of the world’s economies will be so in debt by 2060 that their debt will be downgraded to “junk” status, effectively bankrupting the countries, says a report from Standard & Poor’s ratings agency, which also warns that attempts to deal with the problem could cause social instability.

The report (PDF) — entitled Global Aging 2010: An Irreversible Truth — says that the proportion of the world’s population that is elderly is set to explode to such a degree that many countries will simply not be able to keep up with the ballooning costs of health care and other services.

As elderly people live longer, due to better health care, the proportion of elderly to the rest of the population grows, meaning an ever shrinking proportion of working people is relied upon to fund services for the elderly.

But the report warns that efforts to scale back the costs of government services could “severely test social cohesion.” And the authors admit that public opinion, in general, is unfavorable to cutbacks in social services.

Currently, about one in eight countries have a “junk” debt rating — meaning that their debt is so risky that only the bravest investors would dare buy it. Just under 30 percent of countries have triple-A credit, the best possible score.

But by 2060, if current trends continue, the report projects that fully 60 percent of countries will have a “junk” debt rating, while a negligible amount — perhaps none — will have a triple-A rating. The US is among the likeliest candidates to be in the “junk” debt group.

When a country’s debt is downgraded to “junk,” it becomes virtually impossible for the government to borrow more money. Thus, if the government is running a deficit — as just about all developed countries are doing today — its ability to provide services would collapse.

The country would also see interest rates on its existing debt go through the roof, making it more difficult — if not impossible — to continue paying down the debt. In such a scenario, only a bailout by other countries or institutions could save the country from a literal declaration of bankruptcy — as was the case this year with Greece, whose debt was downgraded to junk but which avoided bankruptcy with a huge bailout from the European Union.

But in a scenario where a majority of countries are all facing “junk” debt status at once, it’s difficult to see where the funds for an external bailout would come from. Without the option of a bailout, only massive tax increases, widespread cuts to services and a policy of currency inflation could have a chance of staving off bankruptcy.

The S&P report states that the overall debt burden among the world’s countries averages to about 40 percent of GDP. By 2050, the report predicts it will have exploded to 245 percent of GDP — two and a half times the size of the economy.

For the United States specifically, the scenario is even worse: S&P forecasts that the US’s national debt will explode from around 69 percent in 2010 to 415 percent in 2050 — an unheard-of level, exceeding even the massive debt levels seen during World War I and World War II.

“The challenges ahead are daunting for the vast majority of [countries] covered in this survey,” the report states. Anbd addressing the problem — whether through tax hikes or spending cuts, or both — “may put the relationship between the state and electorate under strain and severely test social cohesion.”

The report continues, “Nevertheless, our study suggests that unless advanced sovereigns embrace reforms at a faster pace, the fiscal pressures will become increasingly unsustainable. At the same time, the aging demographic profile of their electorates could well make the political climate for reforming pension and health-care programs even more difficult than it is currently….

The report suggests that governments begin to address the problem sooner rather than later, because the longer governments delay, the more difficult it will be to deal with the problem.

Dealing with the issue “may be vital to maintaining social stability. After all, changing the scope of public pension and health-care provision can, if embraced soon enough, help spread the impact over an extended period, with the burden of adjustment shared across generations of taxpayers and voters,” the report states.

For its study, the S&P looked at all the countries of the OECD — a large grouping of the world’s most advanced economies, including the US and most Western countries, as well as all 32 EU member states and a selection of developing countries, including Brazil, China and India.

 
 
 
 
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