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IPFS News Link • Economy - Economics USA

Ask Not Whether Governments Will Default, but How

By Arnaud Mares | London

The sovereign debt crisis is not European: it is global. And it is not over. The European sovereign debt crisis of spring 2010 was a misnomer in more ways than one: there was not one crisis but two. And it will continue well beyond 2010, in our view. The first crisis was, and remains, an institutional crisis of the euro, caused by a flawed multilateral fiscal surveillance framework. Steps have been taken towards a correction of the flaws with a move from peer pressure to peer control of fiscal policy. This is reflected by the acceptance by the Greek, Spanish and Portuguese governments of fiscal measures largely dictated from Berlin and Brussels. The second crisis was, and remains, a sovereign debt crisis: a crisis caused by sovereign balance sheets being overstretched, to the point where insolvency ceases to be merely possible and becomes plausible. This crisis is not limited to the periphery of Europe. It is a global crisis and it is far from over. We take a high-level perspective on the state of government balance sheets and conclude that debt holders have to be prepared to enter an age of ‘financial oppression'.

Debt/GDP has been higher before, so why worry? As government debt and deficits have swollen to levels for which there exist few recent references, all eyes have turned to a more distant past in the hope of finding some guidance as to what future awaits bondholders. At first glance, history appears to be reassuring, though that is deceptive, in our view. Several advanced countries have experienced debt/GDP levels well in excess of current ones. The US emerged from Word War II with a public debt/GDP ratio of approximately 110%, and the UK with a ratio of 250%. The UK national debt has averaged almost 100% of GDP since its creation in 1693. Yet the UK government never defaulted through that period. France's public debt stood at about 280% of GDP at the end of World War II. It did not default either. As a matter of fact France defaulted only once - in 1797 - since the creation of its own national debt in 1789. This is remarkable, considering the number of political, military and economic crises the country went through. So why worry now?

Four reasons why debt/GDP misses the point. The problem with these historical comparisons is not the reference: how governments dealt with their war debt burdens sheds useful light on what might be in store for coming years. Rather, the problem lies with the measurement tool: debt/GDP is the most widely used debt metric, but we believe that it is a very inadequate indicator of government solvency. There are four reasons for this:


3 Comments in Response to

Comment by Olde Reb
Entered on:

Interesting that Morgan Stanley maintains the sanctity of sovereign debt even when the debt is based upon the false premise that it can be paid off. Every fiat “dollar” in circulation has been created as principal from the issuance of a government security. The promise is to pay back the principal PLUS the interest. The interest is never created except as principal from a subsequent issue of another security. This is the operation of a Ponzi scheme. A Ponzi scheme, or any scheme based upon fraud, is void from its inception. The national debt in the United States is perpetual---or actually, until acknowledged bankruptcy.

Yet Morgan Stanley wants the citizenry to endure austerity while the bankers reap vast profits from their fraudulent transactions.


Comment by Ned The Head
Entered on:

Ask not when Morgan Stanley will tell the truth but WHY?

Comment by Powell Gammill
Entered on:

And when?