We are all getting complacent: The sovereign debt crisis is far from over

In Britain, public borrowing is falling at a faster rate than anyone dared hope a few years ago. The ratings agencies are starting to drop hints about upgrading rather than slashing national credit ratings. Heck, even the Greeks are contemplating a return to the bond markets without provoking howls of protests from investors. The sovereign debt crisis that gripped the markets from 2010 to 2015 looks to be over. No one is threatened with bankruptcy anymore, and governments are not about to close down as they run out of cash. 

The trouble is, that is largely an illusion. True, the markets turned out to be far less powerful than once thought, and debt loads that would once have seemed crushing have turned out to be completely manageable. But that doesn’t mean debt doesn’t matter. In truth, every major economy owes far more than it can possibly afford – and when the next downturn comes, that will be become painfully apparent…

And yet, the risk now is that we become complacent. In economics, as in so many other areas of life, just because you got away with something once doesn’t mean you will get away with it next time as well.

Deep into what is now the second-longest expansion since records began, we still have debt-to-GDP ratios that are extraordinary by any historic levels. We will have virtually no room for fiscal flexibility when the next downturn comes, as it inevitably will do one day. And we are still piling up levels of debt that will have to be paid back by generations to come, or else conjured away with a round of hyper-inflation.

We got through the last sovereign debt crisis. But only just – and at the cost of persuading ourselves not to worry about the next one. When that arrives, it will inevitably be a lot harder to cope with.