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Plausible: Sovereign Default On A Global Scale

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By Dian L. Chu, Economic Forecasts & Opinions

Ina CNBC interview on Feb. 10, Marc Faber of Gloom, Boom & Doom Report went out on a limb by stating that he is not buying any sovereign debt or bonds, because ALL governments will eventually default, including the United States.

Faber believes some countries like Singapore may fare better due to very little or no debt and large reserves; however, most of the developed world will be severely effected by Greece, bailout or not. In the near term, Faber is relatively optimistic about stocks, but still thinks precious metals will have better returns.

Meanwhile, Jon Levy with Eurasia Group, though sharing an equally gloomy view, does not share the same dire prediction. Levy believes it will be a "long and drawn-out" adjusting process different from country to country.

Sovereign Default On A Global Scale?

Back in December of 2009, Moody's Investors Service reported that there was $49.5 trillion of sovereign debt outstanding. The rating agencies are worried that governments' massive deficit-spending to pull their economies out of last year's crisis won't produce enough growth to pay for itself.


Furthermore, Moody's pointed to the U.S. and the U.K., whose public debt runs to $12.1 trillion and $1.3 trillion, respectively, as two prime candidates that could potentially lose their triple-A ratings in "worst-case scenarios." Analysts are also worried that Japan, plagued by deflation, will be unable to repay a debt that's projected to hit 220% of GDP in 2014.

Last November, the International Monetary Fund projected that the average debt-to-gross domestic product ratio of the 10 advanced country members of the Group of 20 developing and developed nations would mushroom to 118% by 2014.

Inflation & Higher Interest Rate

The recent market jitters could be a self-fulfilling prophecy. Falling bond prices and higher yields will make it even harder for governments to refinance future obligations. That, in turn, will hurt their currencies, and especially the euro zone

Sure, central banks can always print more money. More printing will inevitably lead to run-away hyper-inflation, and/or the eventual monetary tightening. Higher interest rate and inflation, of course, will probably push all the sovereign strugglers over the cliff while adding a few new ones.

Either way, there will be some nasty consequences to the global bailouts and deficit spending, including a scenario where the dollar could lose its reserve status. Only time will tell.

In that sense, Faber's prediction, while considered extreme by some, is probably not all that far off.

 

http://dianchu.blogspot.com

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to several leading investment websites. Ms. Chu's work is also syndicated to media outlets worldwide. She blogs at Economic (more...)
 

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FOLLOW the MONEY is always a good principle, wheth... by Sabine McNeill on Monday, Mar 15, 2010 at 2:28:20 PM