Tuesday, 23 Feb 2010 12:09 PM
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By: Julie Crawshaw
Kenneth Rogoff, Harvard professor and former IMF chief economist, sees a series of sovereign debt defaults coming.
Ballooning public debt is likely to force several countries to default and the United States to slash spending as a result, Rogoff says.
Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years. I predict we will again,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo.
Rogoff told Bloomberg that financial markets will eventually drive bond yields higher, and European countries such as Greece and Portugal will “have a lot of troubles.”
“It’s very, very hard to call the timing, but it will happen,” Rogoff says. “In rich countries — Germany, the United States and maybe Japan — we are going to see slow growth.”
“They will tighten their belts when the problem hits with interest rates. They will deal with it.”
Worldwide awareness of sovereign debt has risen as nations including Greece reveal fiscal deficits that have swollen in the wake of the worst global financial crisis since the Great Depression.
Although the European Union would likely stand behind Greece to head off any default, a full-fledged rescue will not be necessary, according to Jacques Keller, investment specialist with Amundi Asset Management.
"I am not implying a bailout. Greece has a lot of alternative viable options before there is even talk of a bailout," Keller told Reuters.
Economist David Rosenberg says the sovereign debt crisis is going to be with us for some time, with negative implications for the global economy.
“This is a reminder that every country has its limit,” Rosenberg, chief economist at Gluskin Sheff & Associates, recently told The New York Times. “And our heightened concerns over sovereign credit quality are not going to abate anytime soon.”
He said that “in the land of the blind, the one-eyed man is king. The U.S. dollar is that one-eyed man.”
But that doesn’t mean the U.S. economy is out of the woods.
“Watching the situation in Europe, it’s not even clear that the root cause of problems here at home has been solved,” Rosenberg said.
“We still have a very fragile situation: household balance sheets, and delinquencies, defaults and home prices are still vulnerable to another down leg. People think because you finish one chapter in this post-bubble credit collapse that the book is done.”
But that’s not the case, he says. “Unfortunately, I think we are still in the early stages.”
Respected UBS economist George Magnus also has said sovereign debt default now presents a grave risk to the global economy. “The sustainability of sovereign debt hangs heavily over bond markets and the prospects for economic and financial stability,” he recently wrote in the Financial Times.
Since 2007, budget deficits have soared, particularly in Iceland, Ireland, the U.S., Japan, the U.K. and Spain, Magnus points out.
“There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels and for the pain of protracted fiscal restraint,” he wrote.
“In several EU (European Union) member states, the threshold has already been breached. The specter of sovereign default, therefore, has returned to the rich world.”
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