Rising national debt is fast emerging as perhaps the most worrying hangover from the recession. The latest warning comes from the IMF, which says sovereign debt risks triggering a new round of economic woes.
“If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the real risk of undermining the recovery and extending the financial crisis to a new phase,” said Jose Vinals, director of the IMF’s monetary and capital markets department.
As noted previously on the blog, sovereign debts rose substantially during the crisis as government spent heavily to keep economies afloat. In the OECD area, government debt looks set to equal about 100% of GDP in 2011, up from about 70% before the crisis. That debt, along with government purchases of banks’ bad assets, means that in advanced economies “the biggest threats [to financial stability] have moved from the private to the public sectors”, says the IMF.
There is some good news in the Fund’s latest Global Financial Stability Report: Although banks and financial institutions remain in a “fragile” state, they are – says the IMF – “slowly regaining their health”.