Sovereign debt could be taking the place of subprime debt in the economy, said Wall Street analysts and experts, Yahoo Tech Ticker reported.
Investors are concerned that many countries will have a tough time repaying their burgeoning debts in the future, a scenario which is similar to subprime mortgage holders who failed to make their payments.
Austria, Greece, Spain, Ukraine and Mexico are some of the nations who may default on their loans.
Greece’s Prime Minister George Papandreou said the country “faces the risk of sinking under its debt” while Fitch Ratings and two other ratings said they were concerned about the country’s future.
Rating’s agency Moody’s said that sovereign debt could affect the US and UK, which are AAA countries, Dow Jones reported.
"The overriding theme is that 2010 will at best see a 'normalization' and at worst a severe tightening in government financing conditions," said Pierre Cailleteau, managing director of Moody's Global Sovereign Risk Group.
With stimulus programs ending, he predicts that "long-term interest rates may increase more rapidly than expected."
Retail investors would be better off avoiding investing in investments relating to sovereign debt, experts told MarketWatch.
"I would say this is a very intricate area — investing in currencies and changing interest rate environments around the world is extremely complicated and difficult because there are so many counter cross-currents that can affect you," said Cindy Sweeting, manager of the Templeton Growth Fund.
"It's not really a matter of saying where are the strongest sovereign areas, where are the currencies going to be the strongest. Strong currencies tend to have potentially more interest rates pressures.”
Sweeting said investors could short sovereigns or avoid them.
“When crises happen, you don't want to have exposure... interest rates will rise, the prices of bonds will go down, currencies will drop and those equities will come under pressure,” she said.”
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