The Ongoing Public Debt Crisis in the European Union: Impacts and Lessons for Vietnam

Public debt is a relatively complex concept that most current
approaches agree to refer to the sum of debt whose obligation to repay falls on
the government of a country[1].
According to the World Bank (WB)’s approach, public debt is understood as the
liability of four main groups of institutions: (i) Central government
liability, (ii) Local government liability, (iii) Central banking institution
liability, and (iv) Liabilities of independent organizations, state-owned
enterprises of whose capital the state owns more than 50%, or other
organizations whose debt the government has the responsibility to settle should
they fails to do this[2].

Owing to the
widespread nature of public debt and the fact that countries can easily fall
into public debt crisis – especially since the 80s of the 20th
century – the global community had created a number of criteria to supervise
and warn countries about to, or in the middle of a public debt crisis[3].
However, the criteria most commonly used to estimate a country’s public debt
situation is public debt as a percentage of Gross Domestic Product (GDP). This
figure reflects the size of a country’s public debt as a fraction of the
economy’s income and is calculated as of the 31st December each

            According to a 2010 research of the American
National Bureau of Economic Research (NBER), a survey of more than 44 countries
showed that when the public debt/GDP ration exceeds 90%, it will negatively
impact on economic growth and reduce the economic growth rate of the country in
question by around four percent on average. In particular, for newly emerging
economies like that of Vietnam, the healthy public debt/GDP ratio threshold is
60%, and exceeding this threshold will stall annual economic growth by around 2%.
However, the ratio between public debt and GDP alone is not a  comprehensive estimate of the safety or
riskiness of a country’s public debt – we need to examine public debt in a more
comprehensive manner, in its relation with the system of  macroeconomic criteria of a national economy[4].

Public debt crisis refers to an escalated
public debt situation – or worse, public insolvency – that damages the economy
resulting from a imbalance between national budget revenue and expenditure. The
typical scenario arises from an excess of governmental expenditure over
revenue, forcing the state to borrow money in many ways such as government
bonds, debentures or credit agreements. This results in the state’s inability
to repay its debt obligations. Persisting budget deficit will increase public
debt. Should the state be unable to settle these debts in a timely manner will
lead to an accumulation of interest, further exacerbating the problem.

Minsky (1986)[5] gave an
explanation to what would cause the serious crisis starting in 2007, a flaw of
the financial-credit system. According to him, the financial-credit system
plays a key role in a financial crisis: It led to a large amount of risky and
speculative borrowing by firms and the public alike (borrowing far more than
their existing assets, for instance) to seek profit from appreciating assets.
However, if and when assets depreciates instead (the credit bubble pops), these
speculators will lose much – if not all – of their solvency, resulting in the
insolvency of the entire financial and credit system, leading to a financial
This happened because there was not yet the necessary systems to control and
reduce these speculative and highly risky activities..

b. Cause of the EU
public debt crisis

current public debt crisis in the EU began in Greece when the Greece Prime
Minister announced in November  2009 that
the country’s budget deficit for the year would be 12.7% of GDP, twice as high
as a previously announced figure (Lane, 2012), and that he would try to save
Greece from insolvency. In reality, the country’s public debt had peaked at
€300 billion (around US$440 billion), equal to 124% of the country’s GDP, twice
as high as the level permitted by the Maastricht Treaty. Immediately, on
December 22nd 2009, Moody’s Investors Service had reduced Greece’s
public debt credit ranking from A1 to A2 because of its rising budget deficit.
Previously, Fitch Group an Standard & Poor had reduced Greece’s credit
rating below investment grade. In April 2010, Greece’s budget deficit had risen
to 13.6%, followed by a spike in government bond interest rate; Standard &
Poor reduced Greece’s credit rating to “junk status” – the lowest possible rank[7]. Ireland followed Greece with a
budget deficit of 32% GDP (September 2010), Portugal (January 2012), Spain
(June 2012), Italy (November 2012) and presently Cyprus (March 2013), all fell
into debt crisis[8]. Why did
this debt crisis happen? There were several causes as follows: 

i. Root causes:

First, the problem arises from inefficiencies of
an economic model based heavily on banking and financial services[9]
as well as shortfalls in the EU and Eurozone’s management system. Every time an
economic recession occurs or an election takes place, public debt would spike
as governments have not brought forward long-term solutions to the public debt
problem and instead focusing on short-term solutions. The accumulation of this
problematic management and failure to solve the problem at its root results in
an eventual loss of control of the public debt burden.

Second, the problem also owes to the rapid development
of the financial and banking services based on exploiting market inefficiencies
and based heavily on speculation and speculative investment of the early 90s,
leading to a “fake prosperity”. This caused many instabilities in the labor
structure, big gap of wealth and increasing unemployment and welfare
dependencies. This development of the financial system also, paradoxically,
stabilized the supply of credit, making it easier and promoting borrowing and
rapid growth of credit. These contributed greatly to increasing public debt.

Third, the global financial
crisis in 2008 was greeted with old policies – borrowing to sponsor credit
funds, firms and unemployment support, while government bonds had come to
maturity. This caused an overload as several decades’ worth of debt obligation
fell on these governments at the worst possible timing. While governments have
realized the unsustainability of an economy geavily stilted towards financial
services, they have been unwilling to give up the old habit of a “false”
economy, instead they were opting for a short-term solution
of borrowing new funds to repay old debts and keep insolvent banks afloat.

Fourth, owing to structural
problems, the European Union is heavily restricted in managing its economy as a
whole, lacking mechanisms that would enable the governments of member countries
to reduce budget deficit (Guillen, 2012). This leads to monetary policies not
being consistent with fiscal policies, expecially tax reform and labor
policies. While the EU has a limit on member
countries’ budget deficit and public debts, the managing and supervisory
institutions remain lax, making it easier for countries to borrow and much
harder for the group to control said borrowing. The EU and the European Central
Bank had responded too slowly when the crisis struck. When the politics of
opposing national interests is taken into the equation, the mechanism becomes
even more complicated and self-defeating (Bastasin, 2012).

Fifth, this wasthe emergence of the Euro (€).
This allowed smaller countries to attract a huge amount of foreign investment
owing to the common currency[10].
However, this also caused a major challenge: When the capital flow exceeds the
economy’s capability to sustainably absorb it, the excess capital would easily
be wasted on activities that do not efficiently benefit the economy, leading to
an increase in bad debts among banks, causing an even faster outbreak of a debt
crisis. This is one of the ways the sovereign debt crisis is linked to the banking
crisis in Europe (Shambaugh, 2012)

Sixth, the monetary flows into smaller economies in the EU were too great,
resulting in a huge monetary supply and an increase in price level, causing a
far higher rate of inflation in smaller economies compared to larger ones,
sometimes even greater than the rate of interest (causing, among others, the
value of debts to decrease with time, causing borrowers to gain rather than
lose). The consequence of taking advantage of external monetary flows was a long-term current account balance
deficit, yet countries were unable to control this by their own monetary
policies because of the common currency. Additionally, the use of an external monetary flows would further
increase budget deficit (for want of stimulating domestic production),
exceeding the 3% of GDP as allowed by the EU. This long-term budget
deficit plays a contributing role to exacerbating public debt.

ii. Direct causes

First and
foremost, causes pertaining to interior characteristics of countries undergoing

First, all of the countries currently undergoing
public debt crisis have lax fiscal discipline. End-of-year spending realization of budget would always exceed the expenditure decision of their respective
Parliaments as announced at the beginning of the year. In addition, these
countries had undergone a missed opportunity to tighten fiscal policies
throughout the earlier part of the last decade, owing in no small part to their
poor analytical framework (Lane, 2012).

Second, the distribution of capital, in many
cases, is influenced more by political rather than economic goals. (for examples: defense
and security expenditure, social welfare, retirement wages, interest subsidy of banks for social
welfare projects, governmental protocols or celebrations and so on)

Third, state projects generally are not completed
in a timely manner. This causes an increase in interest payable over the
borrowed funds.

Fourth, low capital utilization efficiency (often
lower than that of private projects with
commercial loans), since the
borrower in the state sector are not directly held responsible for its
repayment. This is to say borrower responsibility is not high as those in charge
of borrowing are not necessarily those who have to settle the debt, especially
if they have a slim chance of being reelected into office.

Fifth, these governments have the capability to
hide problematic issues of the country’s public debt situation over an extended
period (up to ten years), making it impossible to make readjustment in a timely
manner. In fact, the severity of the crisis can be attributed to the
governments’ lack of initiative in the years leading up to, as well as during
the ’lulls’ in between the crises (Lane, 2012). Coupled with the complex and
overlapping nature of this crisis (Shambaugh, 2012), this inactivity has proven
to be extremely damaging.

causes pertaining to external factors:

First, credit rating and risk analysis firms like
Standard & Poor, Moody’s and Filch Group is a contributing factor to the
instability of the market and the crisis itself, owing to their announcement of
lowering the credit rating of these government bonds, thereby decreasing
investors’ confidence in these markets[11].

Second, political pressure from speculators, major
financial organizations and economic powerhouses managed to persuade
governments to adjust rather than reform their financial institutions.
Governments had to spend many billions of Euros to bail out banks and on
stimulus packages to save banks and the economies from collapse. This would invariably lead
to an increase in public debt. At the same time, private banks received funds
from central banks at a low interest rate (around one percent) to finance enterprises for production, but instead,  they used these funds to
repurchase government debts and debentures at a higher interest rate (4 to 5

Third, arbitrage activities with an
aim to raise government bond interest to the highest possible level for maximum
arbitrage profit. In practice, public debt is usually negotiated through
private banks and priced by these private institutions. Such financial
institutions like Alpha Bank, Bank of America, Merrill Lynch, ING Group and so
on have ample opportunities to artificially raise government bond interest[12].

  1. The Vietnamese economy under the impact of the EU public debt crisis.

public debt crisis in the EU in addition to the current problems of the
Vietnamese economy may have a number of negative impacts on it:

First, an increased difficulty in exporting to the EU market.
According to the General Office of Statistics of Vietnam, EU has been Vietnam’s
largest export market (the EU alone consumed around 17.5% of all products
produced in Vietnam in 2012, worth US$20 billion)
[13]. In 2012, difficulties in the
Eurozone economies (high inflation, lowered income, increase in unemployment)
resulted in a general tendency to reduce spending among EU consumers, giving
rise to the demand of goods and services – including those from Vietnam – not
rising. Additionally, EU countries have been increasing protectionistic
measures to protect domestic industries, resulting in greater  dificulties for Vietnamese exports, in
addition to competition from other exporters. While the major relatively inexpensive
export products such as agricultural and forestry products, seafood and
foodstuff experienced a low drop in demand, the other products like furniture,
handicraft,  textile and footwear
suffered a major demand hit.

Second, there was an increase in
domestic market competition. In the backdrop of the ongoing public debt crisis
and the difficulties challenging the entire global economy, Vietnamese firms
are under pressure from foreign investors looking to diversify their market and
hedge risks. These foreign firms are additionally granted advantageous
borrowing rates (in many foreign countries, interest rates of commercial loans
for their own firms are very low), and have greater competence and stronger
trademarks than Vietnamese products, making Vietnamese firms being severely
disadvantaged all but inevitable. 

Third, foreign investment and investors’
confidence in Vietnam decreased. The crisis had forced European firms to
constrict production and lay off employers owing to a decrease in consumption
in both the EU and the world. The most obvious countermeasure is decreasing
inefficient foreign investment. As a result, foreign direct investment flow
from both Europe and the world into Vietnam has decreased. In 2009, Europe’s
FDI into Vietnam took up 18% of total FDI. This figure was reduced to 11% in
2011, continued to decrease in 2012 and seems to continue on this downward
trend in 2013.[14]

according to the evaluation of WB, Vietnam’s business environment index is on
the decrease (in 2011, Vietnam’s business environment ranked 98th
out of the 183 ranked economies, falling eight ranks compared to 2010), showing
the faltering confidence of foreign investors on the Vietnamese business
environment. The main reason behind this is that the public debt crisis in
Europe had caused investors and credit ratings services firms pay greater
attention to the public debt issue. The three groups of main criteria used as
early warning are: (i) excessive debts, reflected in a high public debt over
GDP ratio; (ii) excessive spending, reflected in a high budget deficit over GDP
ratio; and (iii) a continually decreasing GDP growth rate. In 2011, Vietnam’s
public debt was 106% of GDP (see Table 1), state budget deficit was 4.9% of GDP
(see Table 3), the GDP growth rates continually decreased[15]
(see Table 2), making it the riskiest economy in the ASEAN region, with a
S&P credit rating of BB- (a deterioration from the BB rating at the
beginning of the year). This not only negatively impacted on the ability to
attract foreign investment and borrowings, but also increased the cost of
borrowing from international financial organizations owing to a higher

Table 1: Vietnam’s public
debt, 2011


Billion VND

Billion USD

Percentage of GDP

Public debt
according to Vietnam’s definition




    State debt




State guaranteed debt




Local government debt




Public debt
according to the international definition




Public debt according to the Vietnam





State-owned enterprise debts




Source: Vũ Quang Việt, “Public and banking debts of
Vietnam at a glance”, Forum Magazine,
Hanoi, 25/11/2011.

Fifth, there was an
increase in exchange rate risk. In the short term, the appreciation of the US$
relative to the € will decrease
Vietnam’s export goods into the Eurozone owing to Vietnam’s export goods being
valued in USD. In addition, recently the USD are also appreciating relative to
the VND (Vietnamese currency) owing to high inflation in Vietnam from 2008 to
2011 (see Table 3), creating a pressure to adjust exchange rate, yet Vietnam
has maintained the same rate. This causes a risk of existing two interest rates
and the potential risk of smuggled import owing to cheaper import. This will
put a greater pressure on Vietnam’s national foreign exchange reserve.

3. Lessons for Vietnam in
public debt crisis prevention

a. Current
difficulties of the Vietnamese economy.

main reason causing Vietnam’s current difficulties began to emerge in 2006 and
was rooted before that. To promote high growth, Vietnam had promoted investment
very strongly and over an extended period had had an investment-to-GDP ratio,
rating second only behind China (see Table 2). The rate of increase in money
and credit supply was also among the world’s highest and consequently the rate
of inflation was record high in the world. This can be clearly seen when
comparing Vietnam’s exceedingly high investment-to-saving ratio from 2005 to

Table 2: GDP growth rate and
the rate of investment and saving of Vietnam 





























between investment and saving (%)








growth rate (%)









Source: Vu Quang Viet, Crisis and the
financial-credit system
: Practical
analysis in regard to the American and Vietnamese economy
, Washington D.C.,
February 2013; Nguyen Anh Tuan; Vietnamese
External Economic Syllabus
, National Political Publisher, Hanoi 2005.

The rate of investment was much
higher than saving, some years up to 16-17% of GDP (see Table 2). To achieve
this there were only two ways: (i) borrowing from foreign sources, or (ii)
extensive (excessive) issuing of credit lines, resulting in bad debts and very
high inflation as of the last few years (see Table 3). As a result of high
inflation while the government did not adjust the exchange rate between the VND
and the USD, import was highly stimulated, resulting in an unprecedented trade
balance deficit, some years as high as US$18 billion (See table 3). This
excessive investment while efficiency was low resulted in an excessive public
debt. As shown in Table 1, Vietnam’s public debt could have reached US$129
billion, equal to 106% of GDP in 2011, in which state-owned enterprises’ were
US$62.1 billion (see Table 1).

Table 3: Increase in money
supply, credit, CPI, trade balance deficit and state revenue-expenditure of budget
in Vietnam (2006-2011)









Increase in money supply (%)







Increase in credit (%)







Inflation (CPI) (%)







Change in exchange rate (%)







Balance of trade (billion USD)







revenue (Trillion VND)







expenditure (Trillion VND)







Source: ADB, Annual Report 2011, Manila 2012; General Office of Statistics of
Vietnam, Annual Report 2012, Hanoi

b. Lessons and
suggestions for public debt crisis prevention in Vietnam

 i. Basic Guidelines

In order for the Vietnamese economy to avoid
negative impacts from the public debt crisis, we need to examine intrinsic
factors within the Vietnamese economy as well as the causes of the public debt
crisis in the EU and its existing impact on Vietnam as previously analyzed.
There are a number of suggestions:

First, in order to manage and prevent public debt crisis, the most
pressing requirement is an effective governmental regulatory mechanism in order
to control financial activities and the flows of financial sources. This
includes transparency of information, the effective maintenance of macro-level
supervisory mechanism, while guaranteeing the needs for social welfare and
mobilizing and combining resources to develop the country in a sustainable

it is necessary to properly manage and improve efficiency of state investment.
In the long term, state investment needs to be actively reduced while
investment from non-budget sources needs to increase relative to total social
investment; shift the focus of state investment outside of economic activities
so as to concentrate on social and infrastructural investment. In the same
time, there is also a need to reform and standardize the state investment
process in an appropriate manner so as to serve as a selection and
standardization criteria for public projects[16].

state-owned corporations and enterprises diversifying
investment outside of their
main business and production must cease. State-owned enterprises should be concentrated on key
industries of the national economy, mainly those related to and dealing with
socio-economic infrastructure, public services and those pertaining to
macroeconomic stability.

systemic stability, prevention of side effects and debt “traps” and practical
efficiency in both SOE and financial-banking sector restructuring should
be ensured. At the same time, proper care should be taken to effectively handle
such matters as firm acquisitions and mergers, unemployment insurance and
social welfare.

            ii. In-depth suggestions and areas for attention

            On the basis of the guidelines
above, we can draw a number of in-depth lessons and suggestions for public debt
crisis prevention in Vietnam.

First, there are a number of issues pertaining to
state-owned enterprises (SOEs), as followed: (i) cease excessive investment
into SOEs and only maintain a minimal, manageable number of SOEs (between one
to two dozen)[17]; (ii)
put an end to diversification outside of expertise (especially letting a SOE
own a bank, or vice versa)[18];
(iii) every decision to found new SOEs must be carefully discussed and approved
by the National Assembly. The government needs to stop spending more than the
budget previously approved by the National Assembly (notably, in a number of
countries this is considered illegal)[19].

Second, the government should not continue to have the
State Bank issue money for spending and credit distribution, especially for
SOEs as a spearhead for development owing to its lack of efficiency and also
owing to the very large existing budget deficit (from 5% to 7% of GDP, while in
these times a 3% of GDP deficit is already seen as a warning threshold in some
countries). Stimulation of demand through budget deficit is only a temporary
solution and should only be used when there are no other options when the
economy – for any reason – falls into a crisis owing to plummeting demand. It
should never be used as a method for stimulating economic growth because it
will lead to high inflation and loss of stability, since budget deficit would
invariably be remedied by printing money. The reason for Vietnam’s current
economic situation is the stimulation of demand via credit growth (which
increased from 35% to 125% of GDP between 2007 and 2011), but without good
control of the utilization of credit flow.

Third, it is necessary to raise the ratio of equity
(paid-up or owner’s capital) in both private firms and SOEs to ensure stable
development. Currently, in Vietnam the debt-to-equity ratio is 1.77, much
higher than in the United States or Europe (around 0.7). This high ratio of
debt can very quickly lead to financial distress and insolvency should the
interest rate rise.

Fourth, there is a need to focus the power for
development investment into seven regions of Vietnam instead of on a provincial
basis in order to avoid waste owing to overlapping construction investment, as
well as to reduce the influence of the locality on the central organs located
in provinces[20]. In
addition, management of territory, forests, rivers and seas needs to be
stratified between central, regional and local government so as to concentrate
power for infrastructural development. Local governments should not be
permitted to issue their own bonds to foreign markets. Furthermore, local
government bonds should be tightly regulated so as to avoid uncontrollable
layering of debts.

Fifth, it is
worth noting that the excessive expansion of credit in Vietnam (See Table 3) is
because the State Bank lacks the independence according to the standard of a
market economy and of a central bank. Because of this, it had acted not on the
ultimate goal of maintaining market price stability, but according to the
government’s directive to print money for SOEs to become as spearheads for the
economy (that, in reality, was quite inefficient), but consequence of that was
the detriment of the economy. The difficulties facing the Vietnamese economy
occurred when the government began to execute stimulus packages but did not
closely supervise them. Hence most of those funds were not invested on
production but on stocks and real estate. When the bubble pops, this caused great
difficulties for the financial-banking system with an increasing ratio of bad

Sixth, according to the Credit Organizations Law (2010), many banks that had been
given permission for establishment but whose sole purpose was to help local
governments and clienteles to carry out rent seeking
activities because the Law does not
distinguish between commercial and investment bank. According to the experience
from the EU and the US, commercial banks use deposits
from clients to lend, while
investment banks mainly implement portfolio investment using their own money,
or serve
clients to invest in portfolio for the service fees. Hence, in order to avoid risks for the
financial-banking system and crisis, there is an urgent need to amend this law
to emphasize on the difference between the role and function of these two
categories of banks, as well as stopping allowing a bank to own a non-financial
enterprises, or conversely, a non-financial enterprises founding a bank to serve itself.

Seventh, the state bank should establish a standard for
minimum capital for each category of banks, as well as set up and announce
basic statistics of each bank in particular and the financial-monetary system
in general to serve both policy-makers and users of financial services. The
Vietnamese financial-banking system has (i) 101 banks and foreign bank branches
including (a) 5 national commercial banks, each of which having more than US$1
billion in chartered capital and total assets of between US$15 to US$25
billion, (b) 39 private commercial banks, of which only a few banks are large
like Eximbank with chatered capital of US$630 million, Sacombank – US$550
million, ACB – US$470 million[22]; (c) 53 foreign bank branches and banks with 100% foreign capital; (d) 5 foreign joint banks;
(ii) 18 financial firms, 12 financial-lease firms and 1,202 public credit funds, (iii) 105 stock
companies, 47 investment funds, 43 non-life insurance and 10 life insurance firms[23].
This financial system is a very complicated, overlapping that was not properly supervised and
controlled [24].

4. Conclusion

the public debt crisis in Europe continues, casting further doubt on the
already tumultuous and shaky macroeconomic and financial system worldwide, two
questions demand a satisfactory answer. The first, what should be done to save
those economies already engulfed in it and bring them back to financial
healthiness. The second, what should be done for economies not yet in the
crisis to avoid its ripple effect, or worse, being involved in its own crisis. This
paper seeks to find an appropriate answer for the second question in a manner
that is relevant to the Vietnamese economy.

has been discussed, the macro-economy of Vietnam is currently displaying a
number of worrying issues and symptoms. The crisis has struck in the wake of
Vietnam’s rapidly changing economy and exposed a number of key weaknesses in
the country’s macro-economy such as inflation, state budget deficit and the
inefficient use of SOEs as spearhead for the economy, to name a few. This article
has named a number of suggestions to restructure the economy so as to alleviate
these deficiencies at the root, while avoiding a potential public debt crisis.

While a number of issues underlying the European crisis – one may
even say key issues – are inapplicable to Vietnam, namely the dependence on a
shared currency and fiscal policies and the political costs thereof, the
situation in Europe has proven that weaknesses in government budget, in the
banking system and low growth are inseparable and one cannot be examined or
solved without the other. Considering the present state of the Vietnamese
banking and financial sector and its many issues, how these three problems
interact and how to tackle them is an important area that policymakers and
future researches should pay attention to.


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Lisbon and Generational Interval)
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, 13th OSCE Economic
Forum, Trieste Italy, November 2004.

3.      Bastasin, C (2012), Saving Europe: How
National Politics Nearly Destroyed the Euro
, Brookings Institution Press.

4.      Guillen, A (2012), Europe: The Crisis
Within a Crisis
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(Fall 2012), pp 41-68Jolly, D. (2011), European Agency Sells Billion in Bonds to
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, The Journal of Economic Perspectives, Vol. 26, No. 3 (Summer 2012), pp. 49-67

6.      Minsky, H. (1986), Stabilizing an Unstable
Yale University Press, Yale.

7.      Manasse, P. and Roubini, N (2009), Rule
of Thumb for Sovereign Debt Crises
, IMF: Journal of International

8.      Le, N. M., (2011), Public Debt:
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, Banking Academy
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9.      Reinhart, C.M. and Rogoff, K.S., (2010), Growth in a Time of Debt, American Economic Review.

10.  Shambaugh, J; Reis, R and Rey, H (2012), The Euro’s Three Crises,
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11.  Le, S. K (2013), The World Economy
After Crisis: Implications and Prospects
, Publisher of Social Sciences, Ha Noi 2012.

12.  Vu, V. Q., (2013), Crisis and the financial-credit system: Practical Analysis in
Regard to the American and Vietnamese Economy
Washington D.C., February 2013.

13.  Vu, V. Q., (2011) “Public and banking debts of Vietnam at a glance”, Forum Magazine, Hanoi, 25/11/2011.

14.  Dinh, T. C., (2012), EU in the First Two
Decades of 21 Century
, Publisher of Social Sciences, Ha Noi 2012.

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(ed.), National Political Publishing House, Hanoi 1999.

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Vietnam”, Review of Communist, No
169, January 2009

The public sector as defined by the United Nations System of National
Accounting (SNA) includes public service (government) and state-owned
enterprises. Hence, the term “public debt” is also taken to mean the same as
such terms as “governmental debt” (United Nations, System of National Accounts
2008, para. 22.15, “the public sector includes general
government and public corporations”). However, public debt differs from
national debts in that the latter refers to a country’s debt obligation in its
entirety, including both governmental debt and private debts. In other words,
public debt is only a component of national debt.

[2]              This definition
is similar to that of the Debt Management and Financial Analysis System (DMFAS)
of the United Nations Conference on Trade and Development (UNCTAD)

[3]              Supervisory
criteria for a country’s public debt and foreign debt includes: (i) Public debt
as a percentage of GDP, (ii) Foreign debt as a percentage of GDP, (iii)
National debt as a percentage of GDP, (iv) Foreign debt as a percentage of
gross export value, (v) Public debt as a percentage of state budget revenue and
so on.

[4]              These criteria
are: (i) rate and quality of economic growth; (ii) total factor productivity;
(iii) capital utilization efficiency (via the Incremental capital-output ratio
– ICOR); (iv) budget deficit ratio; (v) domestic saving rate and gross domestic
investment; and (vi) a number of other criteria. Additionally, such criteria as
public debt structure, weight of different debt classes, interest structure and
payment period also require in-depth analysis when addressing the
sustainability of public debt. For instance, a public debt worth 100% of
Greece’s GDP caused its bankruptcy, while Japan’s public debt is worth around
200% of its GDP and is still considered sustainable. Another example,
Argentina, has a public debt ratio to GDP less than 60% yet is still undergoing
public debt crisis. According to the Maastricht Treaty in 1992, the European
Union countries are not allowed to have their public debt exceed 60% of their

[5]              Hyman Minsky,
1986, Stabilizing an
Unstable Economy, Yale University Press, Yale.

[6]              Minsky classified borrowers into three
categories: (i) hedge borrowers, who can repay their both principal and
interest from their investment flows; (ii) speculative borrowers, who can repay
interest but has to regularly roll over principal to stay afloat; and (iii)
Ponzi borrowers, who operates on the basis of borrowing money from one creditor
to repay another. His view was that a crisis would happen if the last two categories
outnumbers the first.

[7]              On the 2nd May 2010, the Prime
Minister of Greece had accepted the aid package worth €110 billion (US$143 billion) from Eurozone and IMF, which would come into
effect over the following three years.

[8]              At the end of
2009, typical countries of the EU had the high public debt-GDP ratios such as
Greece – 124%; Portugal – 84,6%; Italy – 120,1%; Germany -  84,5%; Ireland – 82,9%; France – 82,6%.

[9]              Two energetical
crises in 1973-1974 and in 1979-1980 pushed countries in Europe and America
into recession. That was the time when Europe and America restructured and
transformed their economies from industrial production into banking and
financial services with the boom of portfolio investment.

[10]               For instance, the small countries of EU like
Greece, Ireland were allowed to borrow money with interest rates equal to that
of Germany, France. In other words, the small countries took advantage of the
whole EU for their benefit.

At the
beginning of 2009, the long-term interest of EU countries’ government bonds
reached an all-time low by the time the governments issued new bonds, but
within a few weeks the bond market had undergone significant changes. As
S&P’s Ratings Services and Fitch Group began to examine
Greece’s debt and ranked her bonds as junk, their bond interest statred to
increase dramatically while the stock market index went down quite as

[12]             For example, IMF’s report on the 22nd
of April 2010, stating that the economy of Portugal
that was deteriorating, would
grow less than forecasted and would not be able to reduce her deficit. This
caused the interest on Portugal’s 10-year bond to increase significantly, and as at present
Portugal, Spain, Greece, Ireland and Italy are countries that are almost
certain to meet with extreme difficulties reducing their public debt.

[13]             Nguyễn Sinh CĂşc, “An overview on the
economy of Vietnam in 2012 and a forecast for 2013”, Communist Magazine, Hanoi, Jan 2013, pp 69-73. The impact of the
European public debt crisis on Vietnam’s export goods are not very large owing to Vietnam’s exports
mainly being necessaries. In 2012, the amount of goods exported did not
decrease, yet did not increase as much as expected.

[14]             In addition, accoding to general analysis,
global FDI in general and of the EU in particular into Vietnam, aside from the
present crisis, are subject to a number of limiting factors: (i) low general
effectiveness of FDI, still mainly being assembly and
processing projects with
little value added and low capability to participate in the global value chain;
(ii) low ratio of disbursed to registered capital, small project
scale, many projects slow on the execution; (iii) the majority of technologies
attracted via FDI is not modern and is only average compared to the world, very
few firms bringing high technology; (iv) the number of employment created by
FDI is not high, as is the
living quality of FDI firm employees, as well as an increasing number of labor
disputes, (v) there appear many cases of price transfering and tax evading in FDI firms with an
increasing level of sophistication (falsely raising the capital value, input
costs, overheads, education and so on)  to create
“real profit, false losses”, (vi) low diffusion value to ofther economic
sectors, and (vii) a number of projects cause environmental
pollution and waste of

[15]             In 2012, GDP
growth rate of Vietnam economy that was only 5.03% compared with that of 2011,
was lowest growth rate since 2000 (Nguyễn Sinh CĂşc, 2013, Ibid). In 2010, although GDP
growth rate was 6.8%, but this rate attributed to estate bubble and consequence
of economic stimulus packages of 2009 whose utilization was not stricly
controlled and supervised , therefore was not used in proper manner.  

[16]             In particular, there is a need to
distinguish between two classes of goals and criteria for assessing the
efficiency of public investment (for- and non-profit investment), alleviate the
confusion between tcapital for for profit and for non-profit activities as well as the social
responsibility of state-owned enterprises.

[17]             This can be achieved by promoting equitization of SOEs, reduce the weight and number of SOEs of which the state owns controlling shares, only
maintaining SOEs with 100% state capital in industries and fields that the state needs to
maintain a monopoly, or hold a key role in the economy, or that the private
sector cannot or is unwilling to take part in. Additionally, this can also be done
by promoting a multi-owner corportations where SOEs play a key role that can
take on the role as the economy’s lead, while operating according to economic
laws, on the basis of voluntary agreement and cooperation between independent
legal entities.

[18]             At present, the Credit Law of Vietnam permits this.

[19]             Since 2007 the government of Vietnam has
been spending more than the amount approved by the National Assembly on a
yearly basis: In 2007, exceeding 31%; 2008 – 29%; 2009 – 46% and 2010 – 11%. (calculation
based on the statistics on
budget estimates approved by the National Assembly and the budget liquidation at the end of each

[20]             In other words, all branches of central organs like the
State Bank, the Ministry of Finance, the Ministry of Planning and Investment,
the General Office of Statistics and so on  would be stationed on a region rather than
provincial basis, as they are at the moment.

[21]             Until the 31st of May 2012, the
total outstanding debts of the banking system of
Vietnam are around VND2,500 trillion. If
we assume 10% of this figure is bad debt, it would have an absolute value of
250 trillion. According to senior banking expert, Mr Nguyen Tri Hieu, bad debts in Vietnam are around 15% (VND370 trillion)
of which 50% (VND190 trillion) is irretrievable (according to international precedences), which is very
large compared to the banking system’s provident fund (VND70 trillion). At the same time, State Bank
Governor of Vietnam Nguyen Van Binh insinuated that the rate of bad
debt is only 4.47% (around VND117 trillion) and 84% of all debts have
collaterals worth 135% total outstanding debts. On the other hand, according to the
banking inspectional body, the rate of bad debts is closer to 8.6% of outstanding debts (VND202 trillion).

[22]            According to the 141-ND-CP decree  dated the 22th November 2006, up to 31st December
2010, each private commercial bank has to have a minimum chartered capital of VND3 trillion
(more than US$150 million). However, at that time there were 21 banks with a chatered capital less than VND2
trillion, 9 banks having a chartered capital between VND2 to VND3 trillion, and only 9 banks with a chartered capital of above VND3 trillion. At the
meantime, the average global commercial bank has a typical chartered capital of US$1 to US$2 billion.

[23]             Vũ Quang Việt, Crisis and the financial-credit system: Practical analysis in regard to the American and Vietnamese economy, Washington D.C., February 2013 .

[24]             Labor (Người lao động), Market-dominating financial group, 23/1/2013, ( doan tai chinh lung doan thi truong.htm)

Nguyen Anh Tuan got a bachelor degree of Economics at Moscow University (former Soviet Union) in 1986 and master and doctor degrees at University of Malaya (Malaysia) in 1995 and 2003 respectively. He worked at the Institute of World Economy (Academy of Social Sciences and Humanity of Vietnam) for 8 years, then a lecturer and dean of the Faculty of International Economics, the Diplomatic Academy of Vietnam (MOFA). He also completed 2 terms of foreign service at the Embassy of Vietnam in Malaysia and Australia. Now he deals with Diplomatic Academy of Vietnam as Editor-in-Chief of Journal of International Studies.  

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