BBVA Compass economists: Federal debt is sustainable now, but it could quickly veer off-path

- Public debt-to-GDP ratio has peaked at 74 percent, the highest level since World War II

- Another recession in the next decade could put ratio at 120 percent, new report finds

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May 10, 2016, 10:58 ET

HOUSTON, May 10, 2016 /PRNewswire/ -- While the federal debt has reached its highest since World War II, it is still at a sustainable level given the nation's current economic footing — but it could quickly veer off-path if there are any rough patches, BBVA Compass economists say in a new report.

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The ratio of public debt-to-GDP saw a sharp increase from an average of 34 percent from 2000 to 2007 to a peak in 2014 of 74 percent, the same level it maintained in 2015. Determining a healthy ratio is a complex equation — some countries with a ratio under 100 percent have tipped over into crisis, while others with 200 percent have persevered — but BBVA Compass Senior Economist Shushanik Papanyan says what's undisputed from an economics perspective is that now is the time for the U.S. to find ways to lower its debt-to-GDP ratio.

"No one knows what the threshold for a safe debt-to-GDP ratio is for the U.S., but we do know that if we don't do something to improve matters now, when the economy is growing and the Fed's policy is lax, we're missing an opportunity," Papanyan said. "The U.S. can continue to push up against the limit, but it could have serious consequences if breached at precisely the wrong time — when interest rates are even a little bit higher, for instance."

In the current low interest rate environment, the U.S. has the advantage of being able to borrow at a low cost to invest in its future growth. Papanyan writes in the report, "Debt sustainability: Time to splurge or time to save," that certain economic conditions would have to continue — those low borrowing costs, moderate 2.5 percent real growth and near 2 percent inflation — to maintain the current debt-to-GDP ratio in the coming years.

"There are lots of 'what ifs' in that equation," Papanyan said. "What if the Fed raises interest rates and makes it more expensive for the U.S. to borrow or changes its inflation target? If we have another Great Recession in the next decade, our public debt ratio could increase to 120 percent."

Read the full report here: http://bbva.info/debtreport, and find other reports by the bank's research team here. The team analyzes the U.S. economy and Federal Reserve monetary policy. For its analyses, the economists create models and forecasts for growth, inflation, monetary policy and industries. The team also follows a variety of issues that affect the Sunbelt states where BBVA Compass operates. Any statement or opinion of a BBVA Compass economist is that economist's own statement or opinion and does not represent a statement or prediction by BBVA Compass, its parent companies or management.

Follow the team's work on Twitter @BBVAResearchUSA and @BBVACompassNews.

About BBVA Group
BBVA Compass is a subsidiary of BBVA Compass Bancshares Inc., a wholly owned subsidiary of BBVA (NYSE: BBVA) (MAD: BBVA). The BBVA Group is the largest financial institution in Spain and Mexico, has leading franchises in South America and the Sunbelt region of the United States and is also the leading shareholder in Garanti, Turkey's largest bank based on market capitalization. Its diversified business is focused on high-growth markets and it relies on technology as a key sustainable competitive advantage. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture. It operates with the highest integrity, a long-term vision and applies best practices. The Group is present in the main sustainability indexes. More information about the BBVA Group can be found at bbva.com.

About BBVA Compass
BBVA Compass is a Sunbelt-based financial institution that operates 674 branches, including 345 in Texas, 89 in Alabama, 75 in Arizona, 62 in California, 45 in Florida, 38 in Colorado and 20 in New Mexico, and commercial and private client offices throughout the U.S. BBVA Compass ranks among the top 25 largest U.S. commercial banks based on deposit market share and ranks among the largest banks in Alabama (2nd), Texas (4th) and Arizona (4th). BBVA Compass recently earned top nods for best mobile app and best regional bank in the South & West in Money magazine's annual list of the Best Banks in America. Additional information about BBVA Compass can be found at bbvacompass.com, by following @BBVACompassNews on Twitter or visiting newsroom.bbvacompass.com.