Currency Wars

[Brian Ellis]

Is it surprising then that as the global credit markets are taking huge hits since 2008 that high-debt issuers may face increasingly difficult refinancing requirements and that that increases the probability of default considerably?

Where does that place the USA with their ratings? 15 trillion of debt is not negligible.

[Umfriend]

You might want to register with Moody's (it is free) and read their criteria report on sovereign ratings. One of the statements they make is that, e.g., a national debt of 60% GDP, although an important factor, may be present with AAA rated and BB rated countries. More important, in their view, is the resiliance of an economy: how vulnerable is it to shock? Another factor is how easy it is to raise revenue. In the US, the efficiency and effectiveness of tax-collection is rather high (I suspect), in Greece it is in a terrible state.

The first quarterly report of the EU taskforce alledgedly indicates that some euro 60 bln in taxes are due but not collected. That is huge.

Another factor is diversification and flexibility of the economy. I don't think it neccessary to outline that comparison here.

The US already have a negative outlook by Moody's, S&P downgraded the US already not so much because of the amount of debt but more due to the political status quo that impedes effective fiscal action in the US.

[VJ]

One of the statements they make is that, e.g., a national debt of 60% GDP, although an important factor, may be present with AAA rated and BB rated countries. More important, in their view, is the resiliance of an economy: how vulnerable is it to shock? Another factor is how easy it is to raise revenue. In the US, the efficiency and effectiveness of tax-collection is rather high (I suspect), in Greece it is in a terrible state.

(I might be going for "dumb remark of the day #1", but here goes: )
Isn't it easier to raise revenue if the tax collection is rather ineffective: improve on the tax collection, you will raise the revenue. If your tax collection is very effective, then you cannot increase the money you get from it without increasing taxes...

[Umfriend]

That is actually an interesting question. I think the analysis is that when tax collection is effective, raises in taxes are as well, apparantly the tax-paying discipline is rather strong.

Go to Greece and Italy, you'll find that that is far less the case, large black-market operations, tax-evasion, corruption etc. Raising taxes here will likely increase tax evasion even more.

Another question is how feasible it is to raise taxes. In the US, the highest GDP/Capita, it should normally be less of an issue as in "poorer" countries.

You're point is well made though: this is exactly one of the things the EU taskforce will try to achieve in Greece, as well as assist/direct fundamental market structure changes so that the economy may grow. Things the Greece government has bene unable and/or unwilling to do (I don't know which is worse).

[VJ]

That is actually an interesting question. I think the analysis is that when tax collection is effective, raises in taxes are as well, apparantly the tax-paying discipline is rather strong.

True... but raising taxes is never popular. Better organising and enforcing current ones seems less of an aggressive move, and perhaps easier to hide from the public (not unimportant for politicians if they want to survive an election). (just my opinion)

[Umfriend]

I agree VJ, in fact I think it is a duty of the government to enforce the law, including tax law.

Thing is, some countries are simply really really bad at it and, as a creditor, you'd only give a country so much time to get your act together.