Exorcising debt demonsInvestors around the world are bracing themselves for potential shockwaves from the financial turmoil roiling Spain.
The European country announced austerity measures amid concerns that it might need a bailout like Greece and Ireland as it battles massive debt and the deterioration of its real estate market. Spain’s budget deficit surged to 11.4 percent of gross domestic product this year, a dangerous level that will lead to higher borrowing costs.
Many observers are doubtful that the country can pay up to 130 billion euros (196.9 trillion won, $173.7 billion) in debt that matures next year. If Spain - the fourth-largest country in the eurozone - can’t surmount these hurdles, cross-border lenders and relatively strong economies like Germany and France will be hit hard. Spaniards are now about to pay the price for living beyond their means for many years.
The news unsettles us as well. According to Korea’s Finance Ministry, our own debt will top 407 trillion won this year, leading to interest rate payments of 20.2 trillion won.
Our mounting debt burden is the result of credit-fueled spending intended to boost the economy in the face of a global financial crisis. The ministry has assured us that our fiscal situation is not that dire when compared with many other economies. But we have long passed the safe zone. We will have to issue even more debt just to pay the interest on our outstanding loans.
The so-called hidden debt load at state-invested companies and local governments is also elephantine. Government and public sector debt carries annual interest rate payments of more than 600 trillion won. Paying interest will be painful if the benchmark rates climbs higher.
The government must buckle down to address the problem. Officials remain overly optimistic about the economy, expecting a growth rate of more than 5 percent next year and a surplus by 2014. Most other estimates predict growth of about 4.5 percent next year. Instead of making optimistic assumptions and relying on growth, the government must reduce spending and seek ways to boost tax revenue.
Korea is a small-scale open economy that is vulnerable to external upheavals.
The country’s only defense is to maintain a solid financial state and healthy foreign exchange reserves. We must remember that fiscal health was our strongest asset in weathering the financial crisis in 1997 and the global financial crisis two years ago.