Close your eyes and think for a moment about what you think would be the world’s best financial system? Would it include some countries with debt far surpassing what they could possibly repay in a year and other countries having little ability to borrow for infrastructure projects? Would it include countries defaulting on their obligations? Would it include any debt at all?
Now, fast forward to today. Around the world, the average debt load for central governments is 60%, and growing! European countries have some of the highest debt levels, with Greece (168%) and Italy (144%) highest on the list.
Other countries high on the debt list for include Japan (255%), Singapore (168%), Bhutan (123%), and the United States (123%). Besides Greece and Italy, other European countries on the list include France (110%), Portugal (108%), Spain (107%), Belgium (106%), and the United Kingdom (104%).
A Multifaceted Approach
Given the size of the problem, countries will likely need to take a multifaceted approach. An approach that considers everything on the table includes integrating economic policy, jointly adjusting monetary and fiscal policy, and adopting what the best innovative minds can come up with. The magnitude of this issue likely necessitates a comprehensive framework that includes many levels of governments, some type of coordination with the financial restructuring world, and alternative economic growth strategies.
Fiscal Side
As one would expect, the fiscal front will be on the chopping block. Countries will need to prioritize reasonable spending, ensuring that resources are allocated effectively, and implement fiscal policies that reverse the trend of escalating debt levels. Of course, fostering an environment conducive to debt reduction won’t be easy.
International Collaboration
In addition to reigning in massive spending trends, many countries will need to adopt a friendlier relationship with international financial institutions. International and national financial institutions will need to think through debt restructuring mechanisms, potential debt relief initiatives, and frameworks for sustainable lending practices. If you were a fly, these meetings would be ones you’d want to be on the wall for.
Innovation
Innovative financial mechanisms will also play a significant role in addressing the debt crisis. This is an area that is, by-and-large, open to new ideas. It wouldn’t be too surprising to see new Nobel Prize winners for those that can suggest ways to fix the world’s debt problems. Although unknown by definition, innovative financiers may explore new models for debt restructuring, such as debt-for-nature swaps or equity-like instruments, which can provide alternative solutions for debt-laden countries.
Root Causes
As a parting thought, countries will likely need to consider the root causes of the world’s debt problem. Some factors countries will need to consider include corruption, poor governance, and unsustainable borrowing practices. Some solutions might be transparency, accountability, and institutional reforms. Countries may opt for strengthening governance frameworks, improving regulatory mechanisms, and promoting good governance practices – all of which are open to interpretation – which can mitigate the risk of excessive borrowing and mismanagement of funds.
Summing Up
Overall, resolving the global debt crisis will require a concerted effort from governments, national and international financial institutions, and, most importantly, civil society. It will require a blend of slowing spending policies, financial system cooperation on restructuring debt, adoption of yet-to-be-seen innovative financial mechanisms, and structural reforms. Sounds easy enough, but probably not for the faint of heart.
