|  24.01.2013

KPMG: Lack of long-term, disciplined policies threatens to worsen sovereign debt woes

Underlying causes of current sovereign debt crisis were present long before the onset of the global financial crisis of 2007-2008 Aging populations and an interconnected ‘global’ economy will compound the deficit challenge over the medium to long-term

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


Entitled Walking the fiscal tightrope: a fiscal sustainability framework for government,the KPMG research of the fiscal policy settings of 19 of the G20 economies reveals that levels of government debt were already reaching their limits long before the global financial crisis hit, and the impact of aging populations and the interconnected global economy require long-term policies to prevent debt conditions from worsening.


“The need to develop a mid and long term viable fiscal strategy for Romania has become urgent given the current global business environment, even though Romania has an advantage in the sovereign debt crisis – being below the 60% threshold set by the Maastricht Treaty,” says Serban Toader, Senior Partner KPMG in Romania. “The main focus points of this strategy should be on predictibility and stability of the legal framework to support the confidence of the business environment and consolidate Romania’s position as a favorable destination for mid and long term investments and development, “ added Ramona Jurubita, Tax Partner KPMG in Romania.


The report 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.


“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.”


While the research indicates that these deep-seated issues will not likely disappear any time soon, it also notes that the slow outlook for world economic growth in the near-term coupled with the rising costs created by intergenerational aging for many governments will further impact upon fiscal sustainability targets. This, in turn, will heighten the need for sustained fiscal policy action (such as prudent budget management and the restoration of balance sheet health) over the next 40 years.


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.


“This finding is particularly important given the increasing interconnectedness of the global economy,” said Nick Baker, Global Head of KPMG’s Finance & Treasury practice. “Slow growth outlooks within any sizable portion of the world economy will inevitably lead to fiscal challenges in other jurisdictions, making the government debt levels of the developed world particularly worrying for the prospects of those economies in the developing world.”


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