Roubini Says The Problems of Greece and the Euro Area Are a Sign of Things to Come: Sovereign Risks To Spread to U.S., U.K., and Japan

Perhaps on a media offensive lately, Roubini adds:

"There was a socialization of the losses of the financial system and housing market, and now there are huge budget deficits and public debt almost doubled, so we see sovereign risk serious not only in Greece but also in Portugal and Spain, and spreading in the future to the United States, Britain and Japan."

The article mentions that, as we know, Roubini is not alone. Kenneth Rogoff, Harvard professor and former chief economist of the International Monetary Fund (IMF) issued a warning as well stating that Greece is just the beginning of a second wave of bankruptcies. After the financial turmoil of 2008, now it is the excessive indebtedness of the governments of advanced countries that will undermine the economy. Rogoff examined 800 years of financial crisis to write his book, This Time is Different: Eight Centuries of Financial Folly, with Carmen Reinhart. "There are several other countries on the radar: Ireland, Portugal, Spain." Outside the euro zone, Romania, Hungary and the Baltic countries would be other nations that are quite fragile.

He concludes that the pattern is repeated throughout history: after banking crises like the one in the world in 2008, after Lehman Brothers, there is always a wave of sovereign debt crises. To save the financial systems, governments enter into debt. A few years later, there is a wave of crises and sovereign debt defaults. That is, after a crisis in the financial system, there comes a crisis of sovereign debt.

Niall Ferguson, writing in the Financial Times last week, swelled the chorus of pessimists. "It started in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to think that the crisis of sovereign debt under way will be confined to weaker economies in the euro area. This is more than just a Mediterranean problem. This is a fiscal crisis of the Western world." 

Rogoff and Carmen in January published a study, Growth in Time of Debt, that serves as a continuation of their book. Even in countries where a sovereign default is not likely – Great Britain, USA and Japan – the debt has increased so much that these nations will have anemic growth for years. According to Rogoff, when the debt approaches 90% of GDP it acts as a brake on growth. "These countries have growth below potential over the years." According to the economist, the level of indebtedness of the countries most affected by the crisis has risen 75% since 2007.

[According to Paul Kedrosky U.S. public debt is at around 90% of GDP currently. – Ilene]

Greece and Italy have debt exceeding 100% of GDP and Japan, over 200%. By 2014, Great Britain, USA, Italy, Germany and France will have debts between 90% and 100% of GDP, and in Japan, the debt will exceed 240% of GDP.

The U.S. is not near a default. And with Europe more unstable, more investors should park their money in U.S. securities, facilitating the financing of the monumental debt of $ 12.5T. Still, the situation in the medium term is scary. According to recent projections by the White House, the budget deficit this year should be within 11% of GDP. The Chinese have significantly reduced the purchase of U.S. bonds. In 2006, they bought 47% of newly issued securities, in 2008, 20% and last year, only 5%. Morgan Stanley estimates that the yield of the 10 years tresuries will rise from 3.5% to 5.5% by the end of the year. And last week, the Moody’s warned that the AAA rating (highest possible) in the U.S. should not be regarded as assured.

Fitch in its report of December 2009, said that to maintain the AAA status, countries must "implement credible plans for fiscal consolidation and need to generate primary surpluses to maintain investor confidence, in addition to maintaining low and stable inflation."