Public debt: Four ways to deleverage

HOW does public debt influence an economy’s long-term potential? A decade ago, some economists claimed public debt in excess of 90 per cent of GDP led to negative growth. Others disputed these parameters but conceded that advanced economies with public debt above 90 per cent of GDP averaged 2.2 per cent annual growth between 1945 and 2009 compared to 4.2 per cent for those with a ratio below 30 per cent.

Whatever the relationship between sovereign debt and economic growth, many developed economies have debt burdens well in excess of that 90 per cent threshold. When the United Kingdom’s then-prime minister David Cameron emphasised that more deficit spending was out of the question, the country had a debt-to-GDP ratio below 80 per cent. After a decade nurturing the alchemistic money tree, that figure is now 100 per cent. In the United States, after 40 years of almost uninterrupted supply-side “trickle-down economics”, this ratio is over 120 per cent. Should governments ever decide to end this permissive environment and start deleveraging, how could they do it?

1. Redeem

Governments can discharge public debt by selling off infrastructure and other state property. Following the eurozone crisis of the 2010s, for example, Greece sold several of its air- and seaports and a large stake in its telecoms operator OTE, among other assets, to erase part of its liabilities.