P.S. - The Greece

It was depressing to read New York Times article on possible debt crises in United Kingdom a day after I published my blog. It also shows how our rating agencies are still soundly sleeping at the wheels. They recently threatened to cut ratings of Greece. It’s like Doctor showing up when patient is already dead. It’s just useless. The ratings are supposed to show the financial strength of the bond issuer that can be projected, with a reasonable confidence, into the future. I really don’t need these Rating agency bozos to tell me that Greece may default because well,I ALREADY KNOW. The Greek government was gentleman enough to tell me that they ain't got no money!

Anyways, talking about rating agency is another topic. And I should certainly blog about the working, or for that matter non-working, mechanism of these agencies. The point I wanted to make in this blog is to differentiate between sovereign debts. I remember reading long time ago (I think in Economic Times) how western nations are worried about very high level of debt maintained by Indian government. But the big difference between amount of debt Indian government owes in comparison with the amount that US government owes is who it owes money to. The US government or Greek government owes most of their money to foreign lenders; While Indian government borrows heavily from its own citizens. US government sells treasury bonds to raise the money required to run the country. While anyone can buy treasury, a huge and I mean really really huge portion of these bonds are bought by Chinese, Japanese and Saudi government. These governments have a lot of money in their hands and in terms of government stability, US government is the most stable institution in the world. So even if these governments are possibly loosing money by buying these bonds ( if inflation is higher than the interest you get paid then you are actually loosing money) they still keep buying these bonds as if there’s no tomorrow. Theoretically if these foreign governments are to ask their money back when bond matures (the maturity is usually 30 years) then US government may end up in default. Greek government was worse because they actually borrowed money than selling long-term bonds. Moreover, and I read about this in recent Times article, they actually lied on their balance sheet. They systematically rigged the deficit numbers, undervalued future liabilities and payments. They in fact forgot to log the military expenditure. I mean common…..you kidding me!

The debt that Indian government carries on its books is the money they borrowed from their own people. The savings rate is pretty high among Indians. And the tax bas, historically, have been low. So in order to run the functions, Government of India kept issuing various kinds of bonds. So technically speaking the government is in debt but if they are to default then, well, the country will already be in the trouble anyways.

This also makes me think (yes I am thinking a lot lately) or rather question the growth achieved by western nations. Their growth rate picked up quite a bit in last two-three decades and I wonder how much of that growth was because ‘steroid’ debt. Granted the technological innovations appreciably spurred the productivity but research needs to be done.