By Pan Pylas, AP Business Writer
BRUSSELS (AP) — European and U.S. stock markets have encountered turbulence recently as investors worry about the debt crisis enveloping Europe, particularly in Greece.
Here are some questions and answers on the Greece debt crisis and its wider significance.
Q: Why is Greece's debt load — estimated at 123.3% of gross domestic product for this year — such a problem?
A: Greece's debt load has stoked concerns in the markets that it will end up having a full-blown debt crisis. The risk is that it will not be able to get the money it needs to roll over expiring debt and pay off the interest on its rising debt burden, thereby triggering a default.
The principal losers of a default would be those who have exposure to Greece, which includes other countries as well as banks in Greece and Europe holding Greek bonds. In the current globalized world, markets would zero in on the next weakest link — and it's this threat of contagion that has prompted EU leaders to consider ways of helping Greece.
If a much bigger economy, such as Spain, gets into similar difficulties, the global impact would be much greater.
Q: Other countries have large debt loads but no crisis, why?
A: Japan has debt worth nearly 200% of its economy but no one is talking about a potential default. The main reason is that Japan has access to an abundant lending market — its own, the Japanese bond market.
Italy also has a bigger total debt burden but its current annual borrowing of just above 5% of its gross domestic product is way lower than Greece's 13%, meaning that it does not need to tap international investors as urgently.
However, if the EU does not douse the Greek fire, then it might not be long before Italy is in the market's crosshairs.
Q: Don't some countries have low debt but a bad economy?
A: Low debt levels do not necessarily mean that a country has a good economy. After all, one of the reasons why the Great Depression of the 1930s happened was a government obsession to balance budgets. Borrowing can be used to fund capital investments, which should reap returns in the future, and also support economies when times turn sour. When economies recover, these associated social payments for, say, unemployment benefits disappear — helping the budget return to balance.
Q: The U.S. and UK have sharply rising debt levels. Is this a problem for them?
A: It is a problem because borrowing costs money — especially if interest rates start to rise. Borrowing costs will not stay near 0% in the U.S. forever nor at a record low of 0.5% in Britain. Since borrowing levels have to be brought down, there would clearly be an impact on spending programs. The next British government, whoever it is, will have to bring down borrowing levels and government spending will have to be reined in. Do hospitals get less money, or the schools? The choices are not palatable.
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