Citing to the World Bank’s report entitled Global Development Finance: External Debt of Developing Countries displayed on its website on Monday, Indonesia’s debt to GNI ratio stood at 35 percent, or apparently higher than the average ratio in 128 other developing countries that stood at 22.1 percent in the same period.

If compared to the government’s debt to GDP ratio (PDB), the debt to GNI ratio figure was 2 percent higher.

Indonesian government, however, refused to use the debt to GNI ratio mechanism. It prefers to use the existing mechanism, the debt to GDP ratio.

Indonesian Debt Management Director General at the financial ministry Rahmat Waluyanto said that it would ease Indonesia top compare the ratio with other countries since most of countries in the world use the same mechanism.

Indonesian economist at the Indonesian Institute of Science ( LIPI) Adam Latif had proposed the government to use debt to GNI ratio mechanism since the existing PDB mechanism does not reflect the real Indonesia’s debt burden.

The numbers are undoubtedly big, running into many trillions of dollars. The percentages are also daunting, with projections of total gross debt reaching 100% of U.S. GDP this year or next and surging every year thereafter. There is bipartisan agreement that the deficits and overall debt are unsustainable. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, has urged policymakers not just to educate the public about the dangers ahead but also “to scare them to death” about the dire prospects if the debt is allowed to continue to grow.

Almost everyone seems to think that these mounting debts are a severe threat to American prosperity. But what if the real problem isn’t too much debt but too much anxiety about debt?

Let’s take a closer look at the numbers. The amount the U.S. pays to service the national debt isn’t particularly onerous. In fact, interest payments in 2010, which so many have touted as approaching $500 billion, are not much different in inflation-adjusted terms from what servicing cost 20 years ago, especially relative to GDP. The same is true for household debt, which has shot up astronomically in sheer dollars but consumes about the same percentage of household income to service as it did in the 1990s.

The reason we can afford such large debts is that interest rates are so low. At the beginning of 2000, it cost the U.S. government more than 6.5% to borrow money. Now it costs less than 2.5%. That means we can borrow 2½ times as much today for the same cost. Also, the overall economy has expanded dramatically, and relative to the size of the economy, the debt isn’t particularly high by global standards.

The concern, of course, is that one day rates will inevitably go up, which means interest payments will too. According to this school of thought, as our debt grows, lenders will be willing to take the risk of giving more money only if they can get more in return. And yet with the rise of China, India and Brazil, the world is awash in money looking for safe places. Even with the U.S. economy weak, the dollar remains one of the few truly safe havens, and that means interest rates could stay low for a very long time, which in turn means that our debts — however big — can be managed.

Indeed, though eliminating deficits might seem wise, it could actually be fatal to future prosperity. China is spending hundreds of billions of dollars on infrastructure, while America can hardly repair its bridges. The U.S. has to invest and spend to build a future, to help re-create a workforce, and for now debt is a means to that end — provided Washington shows it can effectively channel that money.

Like home mortgages, much of the debt never has to be paid down. Half of the debt of trillions of dollars is owed by the federal government to itself, and a quarter more is owed to the American public. Because of the unique role of the dollar as the global reserve currency, the debt the government owes itself can simply be rolled over endlessly. Only the interest payments are a must. As long as the dollar remains central to the global system — and there is little chance of that changing in the next decade — the U.S. will have the latitude to borrow more than most other countries.

Worrying about debt is like gaining too much weight and worrying about the size of your clothing. America’s indebtedness would be sustainable and even healthy if the underlying economy were vibrant, innovative and strong and if federal and state governments could channel those moneys productively and quickly. The problem isn’t how much debt we’re carrying today; it’s whether the economy of tomorrow will be able to justify it.

And that is the real nub: America isn’t investing enough in its future. We are failing to mobilize resources to improve our health care and infrastructure and stay competitive in a global economy that is more clamorous than ever. Focusing on how much we owe won’t help us meet our real challenges. America’s problem isn’t large clothing; it’s a body politic that is sliding into dangerous habits. Obsessing about the debt is a distraction we can’t afford.

source:

http://www.time.com/time/magazine/article/0,9171,1969745,00.html

The E.U.’s recovery from recession has been fragile and slow — the bloc is only forecast to grow by an anemic 0.7% this year. José Manuel Barroso, the European Commission President, warns that Europe risks a “lost decade” of stagnation and decline if it does not act boldly now to modernize its model of socially inclusive capitalism. The Europe 2020 plan focuses on honing the E.U.’s technological edge, especially in green industries, and on improving higher education. And it sets key targets for E.U. member states, including raising the overall employment rate from 69% to 75%, boosting investment in research and development from 1.9% of E.U. gross domestic product to 3%, and lifting the percentage of 30-34-year-olds with a university education from 31% to 40%.

But there are already doubts about whether a 10-year bureaucratic plan can really turn the E.U. economy around. “These strategies are full of beautiful but nebulous words,” says Jacques Pelkmans, a senior research fellow at the Center for European Policy Studies (CEPS), a Brussels-based think tank. “We shouldn’t expect Chinese growth rates, and we should not raise hopes we cannot meet.”

Indeed, the Europe 2020 strategy had a similarly ambitious predecessor that failed to deliver: the ill-fated Lisbon agenda, which was adopted with fanfare by E.U. leaders a decade ago with the aim of transforming Europe into “the world’s most competitive and dynamic knowledge-based economy” by 2010. But the bloc fell far short of its goal of overtaking the U.S. and Japan, and even failed to meet its self-imposed economic targets. For example, that plan also called for E.U. research and development spending to increase to 3% of GDP, but only Sweden and Finland currently meet that threshold.

There were a number of problems with the Lisbon agenda, such as the fact it had too many targets and there were political splits on issues like opening up labor markets. But another issue was that E.U. leaders were simply unwilling to overhaul their economies — and there was no enforcement mechanism in place to put them into line. Ann Mettler, head of the Lisbon Council, a Brussels-based think tank, says European leaders have been too cautious about reform, backing off, for example, when it comes to tackling energy oligopolies and inefficient, formerly state-run telecom operators. “We are in a state of crisis,” she says. “We can’t just have a battery of lofty goals and feel-good measures. We need political will to address Europe’s real shortcomings.”

This time around, there are growing calls for compliance mechanisms to be built into the strategy. They have become louder as the euro crisis has unfolded in recent weeks, with many officials saying that tougher fiscal oversight might have prevented the collapse of Greece’s public finances. “We cannot have a pick-and-mix strategy, allowing everyone to do the easy parts and leave the real challenges to one side,” Barroso told the European Parliament last week. “We need strong and true coordination in the economic field.”

Barroso sees this is a crisis-driven leap into further European economic integration. Euro-zone finance ministers are already putting Greece’s budgetary policies under more scrutiny than any member state has ever had to endure — and there are now suggestions that similar measures could be taken with economic policies at the E.U. level. In January, Spanish Prime Minister José Luis Zapatero even called for countries to face “corrective measures” if they under-perform economically, although that idea was quickly shot down by Germany, Britain and the Netherlands. Herman Van Rompuy, the new E.U. President, put forth a more nuanced proposal last month, saying E.U. leaders need to collectively take on a role of economic governance when they meet at summits. “The financial and economic crisis obliges us to take steps on this road,” he said.

The Europe 2020 strategy is likely to be put through a number of changes before it is formally endorsed later this month. But whatever it ends up saying, it is expected to be roundly heralded by E.U. leaders as their miracle cure. Whether they are ready to swallow the medicine they have prescribed themselves remains to be seen.

source:

http://www.time.com/time/business/article/0,8599,1969027,00.html

Starting July 1 nearly all federally backed student loans, like Stafford loans, will come directly from the federal government. The measure prevents private student lenders, including Sallie Mae (SLM, Fortune 500) and Nelnet (NNI), from making loans, although both have federal contracts to service government loans to students.

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The bill passed 56-43 in the Senate and 220-207 in the House. It was a part of a budgetary “reconciliation” package that also included changes to the health care overhaul bill President Obama signed into law on Tuesday.

The student loan legislation has been a major priority for President Obama, especially since loans backed by the federal government are the single most common way students finance higher education.

The legislation, which has been the subject of a bitter lobbying battle between the administration and the industry, would save the federal budget $61 billion over 10 years.

Of that amount, $10 billion is earmarked to pay down the federal deficit and $36 billion would be directed to the Pell grant scholarships for lower-income students. That program is currently facing a historic shortfall due to record numbers of Americans who went back to school.

Medicare tax hikes: What the rich will pay

“These reforms will end a sweetheart deal that banks have enjoyed for decades, at the expense of students and families,” said Rep. George Miller, D-Calif., who runs the House education panel. “These savings will be used to help students and families pay for college and reduce our deficit.”

The move saves money by ending subsidies banks get to make the loans and by allowing the government to keep the difference between what it costs to make the loan and what borrowers are charged

Low-income students would benefit the most. The proposal would increase maximum Pell grant awards to $5,900 by 2017, up from $5,500 this fall.

But as a practical matter, most students seeking federal loans won’t notice much of a difference. College financial aid offices would continue to work as intermediaries and many already administer direct government loans.

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Republicans and the private student loan industry have opposed the legislation, arguing that the government shouldn’t cut banks out of the business. They say that thousands of jobs at private lenders are at stake, including 2,500 at Sallie Mae (SLM, Fortune 500).

The foes of the legislation have said that the change will cause delays and disruptions in processing loans. They argued that the government doesn’t have the manpower to take over the high volume of loans now originated by the private sector.

source:

http://money.cnn.com/2010/03/25/news/economy/student_loans_senate/index.htm

When banks stopped lending to each other overnight altogether in the fall of 2008, discount window borrowing became even more crucial. The Fed even narrowed the penalty banks paid for using discount window money, moving the discount rate closer to the Federal funds rate during the crisis.

Now that the crisis has blown over, the Fed wants things to get back to normal. Late Thursday afternoon, it surprised the markets by raising the discount rate it charges though its emergency window to 0.75% from 0.50% while keeping its targeted Federal funds rate at between zero and 0.25%. The change will take effect on Friday. Meanwhile, the duration of the loans will revert to the normal overnight period from 30 days come mid-March. Though many thought the Fed was headed in this direction, most everyone thought it wouldn’t act until its next Open Market Committee meeting next month.

The Fed explained in a brief statement that it wants banks to return to the private debt markets. The increase “will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds.” The central bank added the move was not a signal it was tightening money nor a signal its outlook on the economy had changed. It is a further indication, however, that the government is pulling away from the extraordinary assistance it has given the financial markets over the last few years.

Later this spring the Fed is expected to stop buying mortgage-backed securities, a move that is worrying those in the housing markets who had hoped for a smooth recovery. The government’s numerous bank industry lifelines have been criticized for allowing banks to make heaps of money by borrowing from the Fed at next to nothing and profiting from the spreads they can make by investing that cash in the Treasury markets. But the Fed also has to come up with an exit strategy for a balance sheet that has become bloated with Wall Street’s unwanted assets. Forcing banks back to the short-term debt markets for funding (or even to rely on their own deposit taking operations) is another baby step to getting the banks out of the emergency safety net.

http://blogs.forbes.com/streettalk/2010/02/18/surprise-fed-raises-discount-rate/?boxes=Homepagetopnews

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