What investors need to know about the deficit dilemma

Economic surplurses also pose risks

If a country runs a large state deficit and a large trade deficit at the same time, it is prone to financial accidents and to borrowing crises.

Periodic financial disasters in countries like Argentina and Venezuela occur when falls in their domestic currency make repaying foreign debts particularly expensive, and when poor financial discipline deters world investors from lending more. Foreign investors are best avoiding such risks, as they can lose a lot on both the local currency and the local stockmarket. World markets can tell such countries they are no longer prepared to lend them more money to buy imports, when they cannot afford or to pay public sector wages that are not covered by tax receipts. Brazil is currently b...