Sovereign Debt in Advanced Economies: Overview and Issues for Congress

[Excerpt] Sovereign debt, also called public debt or government debt, refers to debt incurred by governments. Since the global financial crisis of 2008-2009, public debt in advanced economies has increased substantially. A number of factors related to the financial crisis have fueled the increase, including fiscal stimulus packages, the nationalization of private-sector debt, and lower tax revenue. Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years. High levels of debt in advanced economies are a new global concern. High public debt levels have become unsustainable in three Eurozone countries: Greece, Ireland, and Portugal. These countries turned to the International Monetary Fund (IMF) and other European governments for financial assistance in order to avoid defaulting on their loans. Japan’s credit rating was downgraded by Standard and Poor’s (S&P) in January 2011 over concerns about debt levels, and its rating was put on a negative outlook in April 2011. In August 2011, S&P downgraded long-term U.S. government debt from AAA (the highest possible rating) to AA+. To date, many advanced-economy governments have embarked on fiscal austerity programs (such as cutting spending or increasing taxes) to address historically high levels of debt. This policy response has been criticized by some economists as possibly undermining a weak recovery from the global financial crisis. Others argue that the austerity plans do not go far enough, and that more reforms are necessary to bring debt levels, especially with aging populations in many countries