The danger of twin deficits

A country has twin deficits if it accumulates both public and external debt. Among the large OECD countries, this is currently the case in the United States, the United Kingdom and France. This situation of twin deficits is dangerous, and countries posting twin deficits should therefore be viewed with caution , because: The public debt is increasingly held by non-residents, who se holding may be less stable than residents; A crisis can be triggered both by concern about fiscal solvency (will the government be able to service its debt?) and by concern about external solvency (will the country be able to service its external debt?). In the first case, non-residents may sell the country’s public debt; in the second, they may sell all assets in the country’s currency; In the case of a euro-zone country, an external solvency crisis does not lead to a depreciation of the country's exchange rate, but to a very sharp rise in interest rates that rebalances a country's foreign trade by reducing domestic demand.