It will be wise if everyone paid attention to what they say or write, particularly in periods of high economic uncertainty.

We are used to assessing the public debt as a ratio to the national income. This is how economics textbooks, academic journals and the press approach the issue. To join the Eurozone, for instance, the ratio of public debt to national income must be below a certain threshold. Yet, this threshold does no longer have a meaning; this is not to the interest of this commentary.

The nonsensicalness of thresholds

Renowned economist Shiller recently published an article (www.project-syndicate.org). He stresses that debt is a stock variable (like the amount of water in a pool) while national income is a flow variable (like the amount of water pouring to the pool within a given period of time). In other words, when you divide the annual debt by national income, you divide a variable denominated with Turkish lira by an indicator denominated with Turkish lira/year. If your unit is not years but quarters or ten years, for instance, the result would be four times or one tenth of the original, respectively.

What the author tries to highlight is that the judgment that the debt is high or low is not objective and that some threshold values are in fact nonsense. When rumors that public debt is extremely high starts to spread, everyone starts to believe that the debt is actually very high. Then, the interest on borrowing increases and pushes the debt up further. The situation might be different if the reports and statements do not draw such a dramatic picture.

Multiple equilibria models

Shiller's article taking departure from the Greece case reminded me of what we have gone through at the Central Bank (the CBT) after the 2001 crisis. The announcements of the CBT back then were full of similar warnings. A quotation from an announcement dated August 27, 2001: "Negative economic expectations not only cause the drift of exchange rate movements from economic fundamentals and take form of bubbles but also push up interest rates by intensifying perceived risks. In this process, the question as to what extent the domestic debt stock is sustainable permanently occupies the agenda." The CBT's above announcement drew attention to the "high interest rate-high exchange rate" dynamics. It focuses on negative economic expectations resulting from concerns about the sustainability of domestic debt stock as the underlying cause of this picture. The "sustainability" of the debt refers to whether the due proportion of the high public debt could be paid by additional borrowing. You can come across such warnings - or complaints maybe - in the press releases of the CBT between July 2001 and December 2011, particularly.

Literature of economics is full of advanced models based on the dynamics Shiller refers to. In countries which suffer economic vulnerabilities statements reading that there is no need to worry and that everything is on track accompanied with uncertainties might raise the perception that there is a problem to worry about, even if economic fundamentals (for example, budget deficit, current account deficit and inflation) are on track. Then, economic agents might rapidly try to sell the financial assets in the domestic currency to purchase FX. This pushes up the interest and exchange rates. Even if a country is one which suffers high public debt but takes steps in the right direction to overcome this, all efforts might end up being useless against the change in perceptions. Economists call such models the "multiple equilibria" models. On the one side is the good equilibrium with low interest, low debt and high growth, and on the other side is the bad equilibrium with high interest, high debt and low growth. The latter lurks while you are sure that the first one applies. While the economy is in the good equilibrium and there is no change in economic fundamentals, triggering factors suddenly alter the psychology of economic agents and you find yourself in the bad equilibrium.

Public debt issue I referred to above is not a problem in Turkey. However, this does not mean that we cannot draw a lesson from this example: It will be wise if everyone paid attention to what they say or write, particularly in periods of high economic uncertainty.

This commentary was published in Radikal daily on 02.08.2011