A sovereign debt trap is looming that very few
over-indebted countries will be capable of escaping. This grim
warning has been sounded by Standard Life Investments (SLI), a unit
of UK insurer Standard Life.
SLI observes that governments of many
developed economies are suffering from the highest levels of
national debt in a generation. Compounding this problem is slow
economic recovery in recent years which is negatively affecting
their taxation income and spending ability.
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“The end result will be a sovereign debt trap,
a state of affairs where the major debtor nations’ debt is
unsustainable given current bond yields, their fiscal stance and
growth outlook,” predicts SLI.
Adding to the problem, SLI’s global investment
strategist, Richard Batty points to looming, huge sovereign debt
maturities. “The maturity of debt matters,” he stresses.
“Of the big six debtor nations [US, UK,
Germany, France, Italy and Japan], four[US, France, Italy and
Japan] are likely to see up to a quarter of their debt roll over by
the end of 2012.”
In some cases, he believes, this will require
emergency liquidity provisioning from their central bank.
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He continues that sovereign debt problems in
the years ahead are likely to relate more to Italy, Japan and, to a
lesser extent, France.
“Investors are worried about potential
defaults and credit rating downgrades which could induce a ‘buyers
strike’ especially while the nominal [GDP] growth outlook remains
weak as the high stock of debt crowds out the private
sector.”
Batty concludes that of the six big debtor countries only the UK
and Germany have a probable fiscal, funding and growth outcome that
should enable them to avoid a sovereign debt trap.
“While the metrics in the US appear worse, the
fact that it issues the world’s trading currency has so far
placated investor concerns.”
Batty continues: “Examining solutions to avoid
a further sovereign crisis suggests the UK, US and Germany have an
overall ability to engineer policies in aggregate to arrest a lurch
into a debt trap.
“For France, the policy flexibility is more
modest, opening up real risks. Italy, given the current debt
metrics and policy inflexibility will struggle to avoid a liquidity
and debt trap.”
The longer-term outlook for Japan is also
grim, believes Batty. “It appears just a matter of time before
Japanese debt requires a default risk premium, leading to much
higher bond yields,” he warns.
Japan’s sovereign debt equalled a mammoth 220%
of the country’s GDP at the end of 2010, according to the
International Monetary Fund.
For life insurers SLI’s ominous
prognostications are particularly significant. If ever effective
risk management was vital, it is today.
