Respected UBS economist George Magnus says sovereign debt default now presents a grave risk to the global economy.
“The sustainability of sovereign debt hangs heavily over bond markets and the prospects for economic and financial stability,” he wrote in the Financial Times.
Since 2007, budget deficits have soared, particularly in Iceland, Ireland, the U.S., Japan, the U.K. and Spain, Magnus points out.
“There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels and for the pain of protracted fiscal restraint,” he wrote.
“In several EU (European Union) member states, the threshold has already been breached. The specter of sovereign default, therefore, has returned to the rich world.”
Countries don’t have to refuse to pay all their loans to enter default, Magnus says.
“It can mean some type of moratorium on interest payments and the restructuring of loan terms,” he wrote.
Default also can occur through inflation, currency depreciation and capital controls, he says. “Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default.”
New York University economist Nouriel Roubini also is concerned about sovereign debt.
“If countries remain biased toward loose fiscal and monetary policies . . . investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered safe havens,” he wrote in Forbes.
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