Journalists are often accused of doing great violence to the English language, and I myself have occasionally wondered whether I shall be summoned to The Hague for my transgressions. But I now rise to defend the only language that I can speak with any competency. My target: contagion.
Economists love this word, and since I read a lot of their work I encounter it frequently. Economist Nouriel Roubini informs us that extending debt maturities for heavily indebted nations “limits the risk of contagion and the potential losses that financial institutions would bear if the value of debt principal were reduced.” Journalists revel in repeating it. Recently a New York Times headline warned us in boldface type: “Debt Contagion Threatens Italy.” The financial news service Bloomberg tells us that “investors are concerned a default [by Greece] would trigger contagion that would engulf other euro-region members including Ireland, Portugal and Spain.” The worst offender is, predictably, the International Monetary Fund. “Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the I.M.F.’s latest economic report on Europe declared. And so on.
In each case the usage is wholly inappropriate. According to the Canadian Oxford Dictionary (CB’s official text) contagion means “the communication of disease from one person to another by bodily contact.” Its recurring use of late seems to imply that high public debt (or perhaps the state of being unable to pay your creditors) is somehow a communicable medical condition that passes from one country to another like smallpox. Although I’ve not seen the issue of transmission addressed, I presume infection occurs through geographic proximity or trade links. Send your finance minister to Athens for a global conference, and he’ll return with foam dripping from his lips, ready to install new hardwood in every government building, offer generous new subsidies to the ice cream truck sector and pave new four-lane highways across Nunavut.
This is far from what’s actually happening. National debt is not a disease. It is the cumulative result of numerous taxation and spending decisions by governments, generally over long periods of time. When countries decide to spend more than they take in revenue, they must make up the shortfall by borrowing. One popular way of doing that is to issue government bonds, which represent promises to pay lenders their money back, with interest. In return for loaning the money, investors demand a rate of return that provides them an acceptable profit while compensating for the inherent risk they won’t get their money back.
Sentiment in credit markets is fickle. Over the last decade many creditors have been in fine spirits, as evidenced by their wllingness to lend massive sums of money to relatively dicey countries while asking for little in return. For a good long while the meagre interest payments dripped in largely uninterrupted, Argentina notwithstanding. Government bonds increasingly came to be regarded as essentially risk-free, for a variety of reasons. One of them was that bond-rating agencies slapped opinions on risky countries that had a reassuring number of capital or lowercase As in them. It seemed like a good idea at the time.
Bad things sometimes happen to complacent creditors, as Greece’s lenders have discovered periodically. Now they’re discovering yet again. Despite Europe’s resolute efforts to prop up the country, it has become clear that Greece simply can’t pay its bills. This week European leaders bowed to the inevitable, admitting Greece will probably default. Eventually the bond raters get around to disclosing what all sensible people already know: the jig is up. It seems private investors may finally have to take a dreaded “haircut”—that is, they won’t get all their money back.
A funny thing happens when investors get burned: They start to guard their money more closely. They start to demand higher compensation from debtors for the privilege of borrowing it—often much higher. But of course, heavily-indebted states can’t afford the new, higher rates, so they find themselves effectively unable to borrow. That forces them to start firing bureaucrats, raising taxes and selling assets. Critics invariably begin complaining that such tactics are no way to grow an economy, and naturally they’re right. But heavily-indebted countries often have little choice in the matter: they’ve cut themselves off from the easy options, leaving only draconian measures. If a portrait of Mao appears on the Acropolis, you won’t need to look far for an explanation.
This is a sweeping oversimplification of what’s happening now, of course. But investors are not worried about Italy because Greece sneezed on it from across the Ionian Sea; they’re worried because the country has long carried a heavy debt burden, and it’s becoming increasingly unclear whether it will be repaid. If Spain’s troubles worsen, it won’t be because Portugal is convalescing just across the border. Nowhere is there any “contagion” going on.
Those wishing to preserve this accursed word for economic banter may point to other definitions. Most compellingly, Oxford says it can suggest a harmful influence or a widespread moral corruption. This comes closest to the heart of the matter; a large national debt is really a way for one generation to pass along the tab for its excesses to the next. But even then the term isn’t quite right. “Contagion” must be retired from economic discourse immediately. So next time someone uses it to describe the ongoing debt crisis, casually reach across the table and throttle them.