LG ERI (LG Economic Research Institution) looked into the debt of developed countries and the global financial crisis around South Europe. LG ERI agrees that lax financial management of some countries including PIGS (Portugal, Italy, Greece and Spain) paved the way for the crisis but they think the fundamental reason for current the Southern European financial crisis is excessively accumulated debt throughout the global economic boom since 2000.
In 2000, as the mobility of global economy expanded with low interest rates, the world economy increased the growth rate approximately 1 percent on average. In this process, household debt increased rapidly in developed countries, because they didn't consider the falling asset prices risk in households and financial institutions.
It is the same when the government of developed countries raised interest rates and it triggered falling asset prices and it led to the debt crisis and national financial crises.
Then, what are the differences between the current crisis and the national debt crisis in the past LG ERI says that the private sector crisis moved to government sectors in the current debt crisis unlike the past.
Due to the massive bailout to rectify the financial crisis, private debt was transferred to the government sector. And efforts to alleviate the recession through deficit also led to government debt.
The current financial crisis is the extension of the sub-prime crisis, it is not only the problem of some countries such as PIGS. It will be a problem to all companies where they have grown significantly by increasing debt in 2000.
Another important feature of the current crisis is that it occurred in developed countries rather than developing countries. Although Japan, and Nordic countries were hit by severe financial crisis, but have not considered the possibility of national bankruptcy. During the time, the credit status of the countries did not fall enough to worry.
However, during the subprime crisis, developed countries acted as if it were a great threat, not a safety valve in the market, it seems that a big change occurred to traditional perceptions.
Specially, the absolute size of debt was sharply increasing in 2000, even developed countries could not afford to repay debts.
At the same time, developing countries were relatively safe in this crisis in 2000s unlike the 1980-90s. It is because capital flowed into developed countries from developing countries.
In addition, the safety valves they have used to get through the crisis in the past, such as reserves accumulation of foreign debt and aims at larger debt, is another reason why developing nations are more stable, relatively, in a recession. In the 2000s, while debt percentages of developed countries have increased steadily, the debt percentage of developing countries was almost unchanged.
Therefore, LG ERI forecasts that since developed countries are not out of the crisis of the national debt crisis, the directions of the future crises may be different from the past.
