SAN MATEO, CALIF. — August 15, 2011 — It’s no longer just consumers that are reeling with massive debt burdens; sovereign states are now suffocating under the weight of their own national debt problems. Ironically, the measures of evaluating consumer debt goals — credit score, debt to income, and cash flow — are the same yardsticks that nations should be using to assess their own debt resolution plans.
Federal Reserve data shows that consumers in the U.S. held $13.4 trillion in household debt, an enormous number that is only topped by the $14.6 trillion in debt owed by the U.S. Federal government. Fortunately for American consumers, money resource Bills.com can help them evaluate their alternatives for free, using the Debt Coach application.
To help consumers better understand the discussion around national and international debt, as well as provide useful examples of how to apply debt relief strategies, the Bills.com team used Debt Coach to both analyze and recommend a course of action for specific nations.
“The world debt crisis can provide instructional parallels for consumers,” said Bills.com CEO Brad Stroh. “Debt Coach offers a free sophisticated and detailed analysis for each American of their own particular circumstances and a recommendation for the best strategy for their individual needs.”
United States Debt Strategy = Refinance
In evaluating the United States’ debt situation, the Bills.com team and its automated Debt Coach tool considered recent credit ratings from Standard & Poor’s, Moody’s Corporation and Fitch Ratings, the recent debt ceiling deal that recommended budget cuts to reduce government spending by over $2 trillion, existing GDP and assets, and the country’s overall debt obligations.
Given the need to continue issuing future debt and borrowing to finance budget deficits, retaining the country’s credit rating is imperative; meaning a default or restructuring of U.S. debt is largely out of the question. Also, even with the recent tumult over Federal debt, the U.S. still has a relatively low leverage ratio, since GDP stands almost at exactly 100% of national debt. Therefore, the country should be able to comfortably support its debt obligations. Even with slow GDP growth in the 2% range, the U.S. can comfortably manage its debts in the near term. The United States does, however, need to tighten its belt and avoid growing its debt burden substantially into the future, whether through increased revenue or lowered outlays.
In summation, the Bills.com Debt Coach recommendation for the U.S. is to continue to rollover maturities and essentially refinance its debts, particularly in light of the low cost of borrowing. This will help the country manage the debt burden with minimal impact to its credit rating or future ability to borrow.
This is a good roadmap for consumers with a high amount of debt, but with solid income, a strong balance sheet and relatively good credit. For consumers, Moody’s, Fitch and S&P are the equivalent of the primary credit bureaus Experian, TransUnion and Equifax. So retaining an upper-end score — even if it has suffered a bit recently — offers the ability to refinance debt at a competitive interest rate and begin a reasonable path to debt management.
Greek Debt = Debt Settlement or Restructure Debts
Greece is under fire for doubts concerning its ability to sustain its own debt. The country ran up high levels of debt through deficit spending in the early part of the previous decade as its economy grew. However, through accounting irregularities and an economic downturn, Greece is now faced with the danger of default.
Greece has a $300 billion economy according to the IMF’s measure of its GDP, which is dwarfed by its national debt of over 150 percent of its GDP. With no growth in its economy or revenues, Greece is on the brink of a total financial meltdown. Ratings agencies continue to downgrade the country even with continued bailouts from other European nations and multiple austerity plans.
Faced with the danger of default and a rock bottom credit rating, the Bills.com Debt Coach tool recommends that Greece consider a national debt settlement program or restructuring of its debts. This would force lenders to take a haircut on what they are owed, but guarantee they gain some principal back in exchange for letting the Greek economy regain its solid financial footing.
This approach is best for consumers who find themselves facing mounting debt with no prospects for immediate relief and no way to continue paying on them. Traditional refinancing is not an option with their low credit score. Debt settlement allows them to negotiate with creditors for a lower payoff amount, but consumers should keep in mind that it also carries potential risks — including that of a lawsuit or further damage to their credit score.
Italian and French Debt = Borrow From a Rich Uncle (Germany)
As two of the largest economies in the European Union and founding members of the EU, Italy and France have avoided much of the debt crisis so far. However, in recent months they have succumbed to the pressure on maturing bonds that began with Greece, driving up the cost of borrowing money and — in Italy’s case — bringing total debt to almost 120 percent of its GDP.
In analyzing these similar situations, the Bills.com team and Debt Coach took under consideration both countries’ high level of debt, but also the high level of savings in each of their private sectors and planned government intervention. Together, this should provide Italy and France with good long-term prospects. However, the two countries could still benefit from a short-term infusion of capital from a friendly nation at a lower cost of borrowing than they can currently find on their own.
Many consumers with good long-term savings and job prospects, but who find themselves challenged to pay debt obligations because of short-term revenue loss, inflation, or declining home values find themselves in a similar situation. Low credit scores could hurt their chances of finding competitively priced loans, so the best course of action might be seeking help from family members or collateralized loans to continue on a path of self-payment. This allows them to avoid the risk or credit score damage of more severe debt settlement options.
“Consumers have a number of options available to them for reducing debt, ranging from shorter, high risk paths to longer, more conservative options,” continued Mr. Stroh. “By evaluating the circumstances of the U.S. and other countries around the world, consumers can gain a better understanding of their choices, as well as motivation to eliminate their own debt.”
Debt Coach is a first-of-its-kind money tool that helps consumers review what they owe, learn about the five possible debt payoff solutions, and find the best way out of debt based on their own unique preferences and situation. The tool assesses complex factors and historical debt payment data for these five debt solutions in order to make a recommendation that includes payment, total cost and credit impact for each user.
Debt Coach is available at https://debtcoach.bills.com. More information on consumer debt and how to effectively manage debt can be found in the Bills.com Debt Resource.