The only thing everyone is talking about these days is the issue of sovereign debt. We started back at the and of 2009 with Greece and then we added one by one Portugal, Ireland, Spain, Italy, Belgium and maybe France. During this time Romanian officials patted themselves on the back for having a public debt of only 33% of GDP by the latest count. As a matter of fact we started this recessionary period with a debt to GDP ratio of only 13%, but under the shield protecting the economy and – the government would argue – due to the fall in GDP this measure of debt has doubled in 3 years.
Let’s then look at this issue differently: in nominal terms. I will compare the nominal GDP (the top lines) at current price with gross government debt (the low lines), both measured in billion RON. To make it interesting I look at three scenarios:
1) The Good – the economy grows as in 2011 for the next three years and so does gross public debt.
2) The Bad- the economy delivers o growth for 2012 but then it recovers to reach current levels in 2013 and 2014. Gross government debt has a faster increase in 2012 to make up for the GDP slowdown but after it converges to the current growth level.
3) The Ugly- the economy enters a mild recession in 2012 but it grows afterwards to reach the current level of growth by 2014. The gross debt is calibrated accordingly.
This is something that anyone can do at home. What I take from this is that even a mild recession in 2012, i.e. -1.9%, can very rapidly lead gross government debt to a level that in nominal terms is very close to the GDP one. The fast effect is not only due to the future developments but it is mostly a function of the the development of gross debt from 2008 onwards.
The main conclusion from this simple analysis is that during the last three years the debt consolidation story of Romania has deteriorated dramatically and any negative shock from the GDP side will have an exponential effect on the gross government debt. In a sense Romania is where Greece was before 2008. At that time Greece is debt to GDP was only 120%. Two years later was at 160%.
Romania needs to avoid at any cost recession if it wants to avoid the negative impact from higher public debt.