KPMG: Sovereign Debt Woes Could Worsen

By Rob Starr, Content Manager, Big4.com

According to a new report from KPMG International, the roots of the current sovereign debt crisis do not solely lie in the global financial crisis of 2007-2008.

“Our research suggests that, in most cases, short-term thinking and political expediency tend to trump considerations of long-term fiscal sustainability,” said John Herhalt, KPMG’s Global Head of Government and Infrastructure, and a partner in the Canadian firm. “The only way to truly turn the corner on the sovereign debt crisis is for governments to commit to sustained fiscal policy implementation across the political cycle, a strategy that the so-called Fiscal Compact in the euro zone intends to create.”

The report, entitled Walking the fiscal tightrope: a fiscal sustainability framework for government, finds that those countries with high levels of gross debt prior to the start of the crisis – in excess of 60 percent of gross domestic product (GDP) – have been the most limited in their ability to adequately respond to the issue and are now facing a longer and more difficult path back to sound fiscal sustainability.

The report finds that the greatest government debt burden is being carried by the developed world, even though both developed and developing economies command roughly the same percentage of world GDP. By 2015, the top seven developed countries included in this survey (Canada, France, Germany, Italy, Japan, UK and US) will make up 86.5 percent of the total general government sector (GGS) debt accumulated by the 19 countries, while the eight developing countries (Argentina, Brazil, China, India, Indonesia, Mexico, South Africa and Turkey) will hold only 11.6 percent.

“Ultimately, the fiscal sustainability of government finances for both developed and developing economies depends on managing a combination of global economic shifts; existing sovereign debt levels; potentially slower global growth; and the impact of intergenerational change upon government finances,”said Nick Baker, Global Head of KPMG’s Finance & Treasury practice. “It is not about the size of government spending per se, nor is it about the extent of social welfare or the level of entitlement spending that a nation’s citizenry wishes to embrace – it is about ensuring that short-termism and political expediency do not endanger a nation’s long-term fiscal viability.”