Public debt crisis to trigger new “finance storm” by 2012?
Economists believe that financial crisis usually originates from three problems: the monetary crisis, like the one that occurred in Thailand in 1997, the banking crisis, and the public debt crisis. Dr Le Xuan Nghia, Deputy Chair of the Vietnam National Finance Supervision Council, said that in the last many years, public debts have been a burning issue in the world.
Nghia said that in 2006, in a working session at the US Department of Treasury, when discussing about public debts, Nghia expressed his worry that the US public debt could be a big problem in the future. In reply, an US official said that this could not be a problem, because the US public debt was below 100 percent of GDP, while the Japanese debt had reached nearly 200 percent of GPP.
Until the US public crisis broke out, the whole world believed that “holding US bonds means holding gold.”
However, the situation is quite different now. The pride of the US has been deal a strong blow when Standard & Poor’s has lowered the credit rating of the US long term bonds from AAA to AA+. As a result, a lot of investors have bargained away the US bonds, which were considered the most valuable and reliable goods in the past.
China and Japan, the countries which are holding big volumes of US bonds, have reassured the public that the US bonds remain the most important reserves. However, in fact, the governments have lowered the proportions of US bonds in their reserves and increased the gold reserves, which has contributed to the most serious “gold fever” in the history.
The US bond percentage in the Japanese reserves has reduced from 90 percent to 75-80 percent. Meanwhile, the percentage of Brazil has reduced from 90 percent to 81 percent, and Chinese percentage has dropped from 90 to 80 percent.
Finally, the US administration and the US Congress reached an agreement on raising the ceiling public debt level. However, analysts have commented that this does not mean the end to the inner uncertainties in the country.
Tran Trong Quoc Khanh, Director of ACB’s Gold Center, said that the agreement on the raising of the ceiling public debt could be described as the restorative which helps the US patient to pick up. However, the US needs to show its capability to recover the economy in order to pay the 16.4 trillion dollars worth of debts.
Don’t let the grass grow under feet
The warning message over the public debt has, once again, been sent in Vietnam amid the public crisis debt in Europe and the US.
The story about Vietnamese sovereign debts has become burning these days, especially after Fitch Ratings has announced that it maintains the credit rating for Vietnam’s sovereign debt at B+, but said it has not seen any considerable progress in public spending cutting – an important factor to give marks to Vietnam’s public debt.
Fitch Ratings has also stressed that Vietnam’s public debt has exceeded the threshold of 50 percent of GDP, which is higher than the level of 37 percent applied to B grade.
Financial analysts have every reason to keep a strict look at Vietnam’s public debts. According to the Vietnam National Finance Supervision Council, in 2007, the public debt was equal to 33.8 percent of GDP. Meanwhile, the ratio increased to 36.2 percent in 2008, to 41.9 percent in 2009 and then to 56.7 percent in 2010.
The Ministry of Finance has predicted that the public debt of Vietnam would reach 1375 billion dong, or 58.7 percent of GDP in 2011.
As such, just in 2007-2011, the public debt of Vietnam increases by 25 percent, or five percent per annum. With such a speed, Vietnam’s public debt would reach the threshold of 100 percent of GDP.
However, these figures have been calculated based on the Vietnamese standards. And if applying the standards of WB and IMF, Vietnam’s public debt would be equal to 72 percent of GDP.
The 2009 Public Debt Management Law stipulates that the public debts include the government debts, the debts guaranteed by the government and the debts by local authorities. With the concept, the public debts would be narrowed in comparison with WB’s and IMF’s standards.
Analysts have pointed out five worrying factors for Vietnam’s public debts.
Firstly, the US and Europe are now facing the public debt crisis, but they have developed science and technology, and developed economies. Meanwhile, Vietnam is the economy with low productivity and the development relied on natural exploitation and labor use.
Secondly, the public debts include 30 percent of external debts, and 70 percent of domestic debts. And the problem is that the domestic debts are mainly the government bonds purchased by commercial banks.
Thirdly, the public debts include 6-7 billion dollars worth of short term debts, and if putting the figures next to the national reserves, one would see the big worry.
Fourthly, it would be normal if the government pays 12 percent in interest rates to borrow money and obtain the added value of tens of percents per annum, but it would be a problem if the added value is just several percents per annum.
Fifthly, 30 percent of the debts are in Japanese yen, the currency which has been appreciating continuously against the dollars. This also means that Vietnamese public debts have been increasing if calculating in the local currency
TBKTVN
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