A government’s debt is simply the total amount a country owes to its borrowers and the total amount owed is often expressed as a percentage of GDP (the size of its economy).
Governments usually borrow money by issuing a bond, which are mostly bought and traded by banks and investment funds. If it is a 10 year bond, the country pays a fixed interest rate to the bond holders every six months and then pays back the principle after 10 years.
For example, let´s say a 10 year old country with a €100 million economy has been borrowing €10 million every year. It´s total debt will be €100 million, which is 100% of its GDP.
Greece has been making headlines lately because its debt has reached 113% of GDP, which is one of the highest in the world and almost double the 60% limit imposed (in theory!) by the EU.
Government Deficit & EU Crisis
You could be forgiven for thinking a government deficit is something weird and complicated, but it´s not at all. It is simply the difference between what a country earns and what it spends in a fiscal year.
For example, let´s say Country A earns €100 million in 2009 from taxes collected and profits on government funds. During that year it also spends €110 million in health, education, defence and other public services. Its deficit is €10 million or 10% of its GDP that year.
The fact that pretty much all countries in the EU not just broke but tore up their own rules regarding debt limits (60% of GDP) and deficit limits (3% of GDP) has caused all manner of jitters in the financial markets this year.
Greece was the worst offender overall in 2009 (debt 113% and deficit 13.6%) although countries like Italy had a higher debt ratio (115%) and Ireland had a higher deficit ratio (14.6%).
So there are 16 countries in the eurozone all using the same currency, but they have very different levels of debts, deficits, unemployment levels and recovery measures. That worries people.
The same could be said for the USA (Texas is quite healthy, California is certainly not). Of course, this overlooks the fact that the USA is a single political entity whereas the EU is anything but.
A US President is quite restricted in domestic and economic policy though. Republicans don´t want to increase taxes and Democrats don´t want to decrease services.
Messy compromises in both Brussels and Washington then!
Kind Regards
Colin Murphy
