Among these events are the ongoing financial instability of a number of EU countries (Greece, Ireland, Portugal and Spain), a significant amount of public debt of developed countries (U.S., Japan, UK, Italy), with no obvious trend of world economic growth and calls for supporting state injections, as well as the questionable efficiency of pumping the world economy with cheap money, plus, side effects. Moreover, all these problems have become aggravated due to anti-crisis measures, which, in turn, can plunge the world economy into a new stage of the crisis. A new interesting topic emerges out of this - the simultaneous and significant deterioration of public finances in many developed economies in the world.
According to some experts, the crisis of sovereign debt is the most likely of the threats to the world economy in the near future. The deteriorating budget situation since the beginning of the financial and economic crisis led to an increase in the number of countries at risk of default. Budget deficits have risen sharply in many countries as the economic slowdown has reduced tax revenues, while rescuing the financial sector, fiscal incentives and payment of social security benefits have increased public expenses.
After 1,5 hours of discussion about the possible risks of "next crisis", the participants of the World Economic Forum sessions in Davos (January, 2010.) suggested to distinguish the most dangerous problem for the world economy. As a result, 51% of respondents called an increase in government debt and the probability of defaults on it. According to the IMF, total government debt of the "G20" alone will rise from 78% of GDP in pre-crisis period of 2007 to 118% in 2014.
Primarily, this issue touched some EU countries. In particular, Greece faced the problem of serving the excessive accumulation of public debt. Thus, in March - April, it will have to pay about €20 billion. Overall, this year Greece will have to give about 11% of its GDP to debt serving. Country’s being on the verge of default is pushing the government on measures to change the tax and wage payment laws in the framework of the program, aimed at reducing the budget deficit of the country. Therefore, in order to meet the so-called Maastricht criteria, Greece intends to reduce the budget deficit to below 3% of GDP by 2012. This plan provides gradual reduction of fiscal deficit – up to 8.7% of GDP this year, to 5,6% - in 2011, to 2,8% - in 2012 and, finally, to 2% - in 2013 (the figure was 12,7% of GDP in 2009).
As experts noted, world financial and economic crisis has only exacerbated the problematic and nodal points in the economy of Greece although there had already been fundamental problems before the crisis. Greece attracted credit resources, having practically no industrial base in its economy (services make up 75.7% of the GDP of Greece). Meanwhile, 80% of the Greek debt is accounted for foreign creditors. Here, U.S. banks only have loaned $ 18 billion.
If the situation is in worst-case, Athens alone will not be able to solve the problem of its national debt. This may explain Greece’s address for assistance from some key partners. Meanwhile, the EU stipulates for stringent saving of funds by the Greek government, if it wants EU’s assistance. There are also some other problems in this case - the euro zone states cannot give financial assistance to each other, plus, they have to ensure that the national debt does not exceed 60% of GDP and the budget deficit amounts to no more than 3%.
Meanwhile, the Lisbon Treaty of December 2009 obliges EU states to help other member-states who suffered from "serious damages caused by natural disasters or extraordinary events outside the control of the authorities." In the case of Greece, Germany can save it from the financial "disaster", giving state guarantees for the issue of loans. While Germany is hesitating to allocate funds to Greece, France is opposing its appeal for help to the IMF. Nevertheless, if worst-case scenario unfolds in Greece, EU countries will have to give extra help to it due to the possible influence of the "Greek factor" to overall stability of the EU.
Generally, according to the traditional pattern, in such cases the governments would devalue the national currency and eventually pay the debts, but for Greece this option is difficult to implement, as it cannot affect the monetary policy of the ECB. Against this background, analytical circles suggest Greece to withdraw from the euro zone and return to the drachma. But, it would be advantageous for the stronger economies in the EU, but detrimental to Greece itself. In this case, the EU, having expanded political boundaries, should take economic responsibility for its states. In addition, there are no necessary procedures for withdrawal from the euro area and the EU.
The severity of the current situation is that the problems of Greece’s financial sector by a single financial chain may spread to other EU countries. 20 of the 27 EU member states have budget deficits above 3% of GDP, whereas a year ago, such figures have been unthinkable for the majority of them. Now it is a usual case. According to forecasts, this year the state budget deficit in average will reach 7,5% of GDP.
Apart from Greece, the countries like Portugal, Spain, Italy and Ireland also face problems with the state budget balance and public debt. Spain, for instance, lost its economic competitiveness as the wage level was rapidly increasing in pre-crisis years. During the boom, its population’s purchasing power was higher than Italy’s and closer to the one of France. Low interest rates in the euro zone, fixed because of Germany’s low inflation, have contributed to the formation of real estate bubbles that have eventually burst. In this case, the Spanish economy is still recovering from the crisis; one of the main sectors - construction - is in deep depression and threatens to stay in it for a long time. According to «The Wall Street Journal», the unemployment rate in the country has grown to 19% over the past few months, while the budget deficit has also been augmenting along with rising public dept.
Government of Spain has worked out a program to reduce the budget deficit to 3% of GDP by 2013. Athens has already planned to have tax increases and spending cuts this year. It is expected that Spain’s public debt will reach a maximum of 74% of GDP in 2012 compared to today's 113% of Greece and Italy. Portugal has also followed Greece and Spain and adopted a Stability and Growth Program (SGP). In accordance with this program, by 2013 Lisbon will reduce the state budget deficit from last year's 9,3% to 2,8%. Public debt, making 76.6% of GDP, will be at a level of about 90% of GDP by this date. In particular, the government will toughen economic measures as freezing wages and pensions, abolishing tax concessions and sailing its shares in major companies.
Experts believe that Spain will be a challenge for the euro. This is because the Spanish economy is almost twice as one of Greece, combined economies of Portugal and Ireland, and therefore, will cost much more to support. If it is easy to support Greece and Portugal, which produce less than 5% of Eurozone’s GDP,  then in case of Spain, everything will be much harder, because it makes 11,7% of European GDP. To restore confidence in the Spanish financial system Madrid have to infuse about $ 270 billion, says the leading newspaper of BNP Paribas. According to them, similar measures in Greece, Ireland or Portugal would require $ 68 billion, $ 47 billion and $ 41 billion respectively.
In 2010, the Eurozone countries will have to pay the creditors in total amount of €1,63 trillion. Outside the Euro area, the British Government is steadily increasing volume of borrowing. In January 2010, British national debt increased by £ 4,3 billion ($ 6.6 billion), although due to the tax revenue it was expected to decrease by £ 1 billion. In January, Britain for the first time in its history experienced the budget deficit. If the British authorities continue borrowing and budget deficits -  growing at the same rate, then budget expenditures will exceed income by 12,8% at the end of 2010, which is higher than expected deficit of Greece (12,7%). However, fears for the UK is less than fears for Greece, as the UK has less debt relative to GDP - about 60% compared to more than 100% of Greece. In addition, the British government debts have a longer maturity.
However, the complexity of the situation in Britain exacerbates by the decision of the Government as of March 16, to reject the EU calls on new measures to reduce the budget deficit over the medium term, explaining that it could harm the public finances. London plans to reduce the deficit by 4,7% of GDP in 2014 - 2015 fiscal years from expected 12,1% in 2010 - 2011. This means that London will not be able to meet the time given by EU finance ministers at the end of 2009. However, the European Commission questioned in its statement the effectiveness of these measures due to unfavorable economic environment. Macroeconomic conditions may be worse than anticipated. Against the background of uncertainty about the further future of the banking sector, even planned deficit reduction by the British authorities may not be realized.
On the other side of the continent, Japan also is in the face of a huge public debt. The amount of Japan’s debt comprises 204% of GDP. This debt is financed mainly by domestic savings of the population, so the default will mean the loss of its citizens’ funds. Across the Atlantic Ocean, the United States also have colossal debt during the crisis period. This year alone U.S. must pay up $ 1.7 trillion on Treasury bonds. Some American experts believe that the U.S. cannot avoid "very painful" measures to raise taxes and reduce the FRS’s expenses, which can bring to volatile financial markets. However, it is possible that Washington would reduce government expenses only after the exhaustion of possible impacts on the situation through measures of monetary policy. In case of US banks, more than 700 banks, or every 11-th bank is on the edge of bankruptcy according to the research of Federal Banking Agency. This is the highest figure since 1992, when it was 1,066 banks. Before the economic crisis in the fourth quarter of 2007, the list consisted of only 76 U.S. banks. Meanwhile, the high liquidity of U.S. government securities market and the exceptional status of the U.S. dollar, as the international reserve currency, allow Washington take the crisis with the least losses.
However, the current situation with the sovereign defaults in the global economy has two sides. The first, the problem occurs in developed countries. It is known that these countries account for a significant proportion of world GDP. In addition, these countries have extensive economic relations with countries in South-East Asia, CIS, Middle East and South Asia. The presence of a significant amount of government debts of developed countries against the backdrop of weak global conditions and incentives for its growth hinders the timely exit of the world economy from the crisis.
Economists estimate that when the sovereign debt reaches 90% of GDP, economic growth will slow down by 1 pp per year. The governments had to divert more of their budgets on payment of creditors, rather than investments in the domestic market and industry. A growing share of the costs of servicing the debt prevents from economic growth. This increases particular concerns in the current environment, taking into account that most countries now have far fewer opportunities for growth than before the crisis. If concerns about the sovereign risk increase, then the cost of credit will grow even more, holding back economic growth and tax revenues (which may make it harder for governments to improve their financial situation). All these in the context of the global economic development bring the developing countries, such as the BRIC countries to a more prominent position, and make them a major source of global growth.
The second, if in 2008 major banks (the first bank to become bankrupt was Lehman Brothers) were instable, now developed western countries are in such situation. If in the case of banks, assistance was provided by the governments, in case of countries, the issue is taking more systemic nature. It is evident that the current situation in Greece has identified the necessity to take some immediate measures to optimize the EU's monetary union. In particular, it would be beneficial to establish a fund within EU (like the IMF) that would work out conditions and amounts of money to allocate for the most crisis-hit countries. Such a tool would allow crisis issues in a country without disruption of the euro zone. According to German experts, there was a mistake made while developing the EU monetary union. Hence, the possible financial crisis of one of the member countries was not taken into account. Today, therefore, a mechanism is needed which would allow to help those who are in crisis.
In conclusion, it can be noted that further development of the world economy is affected by fundamental risk, which is expressed by a large amount of public debt and budget deficits of developed countries, as well as the incompleteness of the recession. In this case, as one of the key measures to exit from the crisis at this stage is the continuation by major developed countries of policies on increasing government debt and budget deficit, because, otherwise, the reconstruction of the world economy may be endangered. It is possible that the political opposition can also raise the risk of another recession in 2011 and later on.

Nodir Jumaniyazov, Ph.D
Expert of the Center for Political Studies