Solution for Redesigning Fiscal Consolidation and Debt Management
Fiscal consolidation should take account of not just solvency but also liquidity considerations, such as the size of the yearly borrowing requirement.
The magnitude of the borrowing requirements reached by several of the advanced economies is notable. As reported by the IMF Fiscal Outlook for 2011, the borrowing requirement (the sum of the budget deficit plus debt amortizations) amounts to 56% of GDP in Japan, 29% of GDP in the US; between 20 and 24% of GDP in Greece, Italy, Belgium, Portugal, Ireland and France; and 19% of GDP in Spain.
Debt maturities have been shortened in several economies to take full advantage of near-zero short-term interest rates, contributing to increasing the size of aggregate financing requirements. Hence, when borrowing requirements expand very fast, it is not surprising that market pressures have materialized in the smaller or the most indebted EU economies.
