By Pranav Sehgal

Opinions Editor

The current financial crisis has highlighted and exasperated the problem of sovereign debt.

“After a financial crisis like the one of the past two years, there’s typically a wave of sovereign default crises,” Harvard professor Kenneth Rogoff said.

As we have seen over the course of history, foreign loans can be greatly beneficial to a nation or they can become an oppressive burden that forces the population to make huge sacrifices.

Developed countries like the United States and Japan face sovereign debt dilemmas because if they continue to spend exorbitantly, investors will become increasingly concerned that they will not pay back their loans, as they are in many countries in Europe, and freeze investment.

Government spending in these countries is also an issue because it crowds out consumption and investment. In addition, if the United States continues to spend, it is inevitable that the dollar will depreciate and that investors such as China will lose money on their investments.

In response to this depreciation, major investors like China will look for alternative currencies and stop investment, which would cripple the Untied States. The outlook for Japan and the United States is increasingly bleak because “an aging population, a sluggish economic recovery and high unemployment will keep governments’ entitlement spending high,” according to Forbes.com.

In order to achieve credibility with investors in the case of the United States and Japan, I believe that they should enforce tighter fiscal policies and engage in the type of financial reforms President Obama has already started. It will only be through these measures that economic stability will be sustained.