Tags: David | Roche | Sovereign | Defaults | Possible

Roche: Wave of Sovereign Defaults Possible

By Dan Weil   |   Tuesday, 13 Apr 2010 08:30 AM

The possibility of multiple sovereign debt defaults is a real one, and that’s obviously bad news for the global economy, says David Roche, ex-chief global strategist at Morgan Stanley.

“High levels of sovereign debt will, at best, mean significantly below-trend economic growth over the rest of this decade,” Roche, now president of research firm Independent Strategy, and his Independent Strategy colleague Bob McKee, recently wrote in the Financial Times.

“At worst, there will be a series of sovereign debt defaults that will ricochet through some leading economies and plunge the global economy back into recession,” they write.

The duo point out that countries are running unsustainably large budget deficits. The Congressional Budget Office estimates that the U.S. deficit will total 10.3 percent of GDP this year under President Barack Obama’s budget.

None of the major debtors can finance their deficits domestically, Roche and McKee explain.

And the final outcome won’t be pretty, they say.

“Creating new sovereign borrowing to finance another thriftless consumer binge and more asset bubbles is no way to achieve sustainable growth.”

Pimco chief investment officer Bill Gross sees sovereign debt as an ongoing problem.

“Global markets for 12 months have been re-levered on the back of government and central bank credit creation," he told CNBC.

“Think of this as a balloon that’s been expanded. . . . Now we’re beginning to question the pricing of all risk assets.”

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The possibility of multiple sovereign debt defaults is a real one, and that s obviously bad news for the global economy, says David Roche, ex-chief global strategist at Morgan Stanley. High levels of sovereign debt will, at best, mean significantly below-trend economic...
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