Torie, isn't the real threat of long-term debt overhang a prolonged stagnation in growth? There was a paper recently published by Carmen Reinhardt and Kenneth Rogoff that conducted a study of 26 countries, and the findings relevant to interest rates were interesting. These economists had established in another paper in 2010 something that is obviously relevant for us, namely that, for countries where debt-to-GDP ratios surpassed 90%, there was a more consistent negative effect of the debt on long-term growth, and since we've reached 100% and rising, we've crossed a bad threshold. But in their most recent study of 26 countries with long-term debt overhang, 11 countries had virtually unchanged or lower interest rates than in low debt years. See pp. 16ff of their report and especially figure 4 on page 19.
http://www.economics.harvard.edu/files/faculty/51_Debt_Overhangs.pdfSince 15 of the 26 countries sampled did experience higher interest rates with long-term debt overhangs, it's certainly a concern. But the most recent examples of Japan and the U.S., and the great variety of interest rate reaction to different levels of debt overhang seem enough reason not to jump to conclusions about a linear effect of big debt-overhang on interest rates. The real problem of long-term debt seems to be the threat of long-term economic stagnation, which obviously would be bad both for our economy and for continuation of government services.
