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According to the article written by Ms. Carmen Reinhart, it has been confirmed at the G-20 meeting that the risks coming from the advanced and developing countries constitute the greatest menace to the stabilization of the global economy.
It was stated that structural reforms, as well as fiscal incentives, should be introduced to scale the current debt down. Regarding the largest economies, a comprehensive restructuring cannot be applied, as the problem evolves from the existing large public and private debts. In the first decade of the 21st century, when the crisis burst, it was considered that the repayment of the accumulated debt would take time, but the recovery of the crisis substitutions has been procrastinated due to low bank balance sheets. In particular, many banks could not make balance cleanups due to a large amount of non-performing loans.
Ms. Reinhart and Mr. Rogoff noted in their previous study that the recovery period of advanced economies took an average of more than seven years (9). Additionally, they mentioned, “the decline in per capita income from its peak at the onset of the crisis to its trough at the recession’s bottom averaged about 9.6%” (Reinhart 5). It is worthy of noting that the performance of emerging markets was much worse. Currently, Germany and the United States are among countries with advanced economies that could most quickly recover from the crisis. Ireland and the UK are next to stabilize the situation, while the crisis is far from being over in Greece.
Relation to other articles
Spence claims in his research paper that after the global financial crisis, austerity and rebalancing have become the main slogans of the global economy (1). Yet, the prospects of economic growth are highly questioned due to the remaining high debt, while the article by El-Arian explains that for several countries the domestic debt dynamics is the leading problem. As in the case of Greece, the government has been accumulating the debt until it became an unbearable load of the country.
When evidence of the excess debt became apparent, the country stopped receiving new loans, which made repaying the external debt impossible (“Macroeconomics” 39). The government has strived to enhance the situation; however, “with its cash balances severely stressed, it seems unlikely to be able to pay the cascading debt payments that are falling due over the next few months” (El-Erian 1).
According to the articles written by Reinhart and Spence, the highest risks and concerns emanate from the developing countries that are mainly affected by the tectonic changes in the global economic climate. China has been importing large amounts of raw materials, which resulted in higher prices and therefore in the economic growth of the exporting countries.
Despite this fact, the increased interest rates and decreased economic growth (and therefore investment) of China, compiled with the oil prices collapsing have led to the fact that an abundant inflow of capital has stopped (Sheng and Geng 3). Needless to say that during recent years, the currency of many developing countries sharply devalued, which has complicated the repaying of the external dollar-denominated debt. The export revenues have declined; consequently, the economic slowdown has caused the budget hit in most countries.
Summing up, all four articles underline that the nature of the debt is significant for analyzing the underlying reasons for the economic crisis. If the debt has been accumulated due to the investment promotion, it may have a positive outcome, whereas, “if it is financing “current operations” and raising short-term aggregate demand, it is highly risky” (Spence 17). Countries must pay attention to the kind of debt they have accumulated and then take measures to stimulate further economic growth and to decrease the current debt.
El-Erian, Mohamed A. “Time for Debt Reduction in Greece.” Project Syndicate. 2016. Web.
“Macroeconomics, Monetary Policy, and the Crisis.” In the Wake of the Crisis: Leading Economists Reassess Economic Policy. Ed. Joseph Stiglitz. Washington, D. C.: International Monetary Fund, 2012. 37-55. Print.
Reinhart, Carmen. “The Post-Crisis Economy’s Long Debt Hangover.” Project Syndicate. 2016. Web.
Reinhart, Carmen and Kenneth Rogoff. Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten. Washington, D. C.: International Monetary Fund, 2013. Print.
Sheng, Andrew and Xiao Geng. “Moving From Debt to Equity in China.” Project Syndicate. 2016. Web.
Spence, Michael. “Managing Debt in an Overleveraged World.” Project Syndicate. 2016. Web.