Thursday, 25 February 2010

Sovereign debt crisis on the cards

Ballooning public debt is likely to force several countries to default and the United States to slash spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big US banks.

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Guanyu 道 said...

Sovereign debt crisis on the cards

Harvard’s Rogoff warns that history will repeat itself with global defaults

Bloomberg in Tokyo
24 February 2010

Ballooning public debt is likely to force several countries to default and the United States to slash spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big US banks.

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 yesterday.

He said financial markets would eventually drive bond yields higher, and European countries such as Greece and Portugal would “have a lot of troubles”.

Global scrutiny 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 Depression.

“It’s very, very hard to call the timing, but it will happen,” Rogoff, a co-author of a history on financial calamities, said in the speech. “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.”

Concern about Greece’s ability to fund its debt have roiled financial markets since the government said it had a budget shortfall of 12.7 per cent last year, the highest ratio in the 27-member European Union.

Greece’s debt totalled €298.5 billion (HK$3.16 trillion) at the end of last year. That is about five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.

The cost of protecting Greek sovereign debt from default surged last month, then fell this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That is up from 171 at the start of December.

“Greece just highlights that one of those risks is sovereign default,” said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ.

Still, “it doesn’t justify the situation where we’re all in a panic and are going back to cash in the post-Lehman shock”, she said, referring to the global credit freeze following the September 2008 collapse of Lehman Brothers Holdings.

In an August 2008 interview, Rogoff said “the worst is yet to come in the US” and he predicted the collapse of major investment banks.

Meanwhile, Japan has the largest debt of all, with the finance ministry estimating borrowings of 973 trillion yen (HK$83 trillion) by March next year, more than the economic output of Britain, France and Italy combined.

Japanese fiscal policy is “out of control”, said Rogoff, who is a member of the Group of 30, a panel of central bankers, finance officials and academics headed by former Federal Reserve chairman Paul Volcker.

Standard & Poor’s last month warned that it may downgrade Japan’s AA credit rating unless the government comes up with a plan to reduce the debt burden.

Bank of Japan governor Masaaki Shirakawa last week urged the government to show how it plans to repair its finances, and Finance Minister Naoto Kan aims to release a fiscal strategy by June.

Fink said Japan’s debt was sustainable because more than 90 per cent of the country’s bonds were held by domestic investors, reducing the risk of capital flight.

“For Japanese investors, JGBs are risk-free assets no matter what S&P ranks them,” she said.

Rogoff’s 2009 book This Time is Different, co-written with Carmen Reinhart, charts the history of financial crises in 66 countries.