Saturday, May 8, 2010
Frank Newman: The sovereign debt crisis
Unfortunately Greece is not going to be the end of the matter. Others within the European community are likely to write new chapters and it is now speculated that Portugal, Spain, Ireland, and even Italy will default on their sovereign debt at some time in the future. The USA and UK too are beginning to set off ever louder alarm bells as their governments try to revive their economies through deficit stimulus programs.
The question is can rich countries like Germany continue bailing out their spendthrift neighbours? The answer is clearly no – the shear scale of the problem is too great, no one will be able to bail out the banks that have lent money to spendthrift countries.
Unlike a mortgagee sale, sovereign debt positions are problematic to enforce and can only be collected with the assistance of the debtor nation government. That inevitably means unsustainable positions endure for years and even decades before economic crisis becomes political reality.
That presents a time window of hope for politicians to make structural reforms to make their economies viable in the long-run, although I have doubts that the short-term political life-cycles are conducive to fronting harsh economic realities.
Time is indeed what the New Zealand government is hoping for to turn around the NZ$1 billion a month deficit being added to our sovereign debt. Should the deficit persist New Zealand too will have debt levels on a par with Greece, and have a savings regime forced upon us by our creditors.
at 10:50 AM