Winter 2011international-economy.com/TIE_W11_SovereignDebtSymp.pdf · 2012. 6. 25. · Title: Winter 2011 Created Date: 20120625165512-05'00

12 THE INTERNATIONAL ECONOMY WINTER 2011

The Year of the

Crisis

TIE ASKED a number of top thinkers

to focus on the outlook for sovereigndebt. How likely are countries in theeurozone’s periphery (Greece, Ireland,Portugal, and Spain) to default outrightor face significant “haircuts” on theirsovereign debt over the next three tofive years? What is the probability inthe next three to five years that any ofthe major industrialized countries (theUnited States, Japan, Germany, France,and the United Kingdom) lose their topratings*? And how might the increasedprospect of default in the eurozoneperiphery and the loss of triple-A ratingsin the major industrialized countries

affect the global economy?

*Note: on January 27, the Standard & Poor’s rating

agency downgraded Japan to AA-minus. Other rating

agencies have left Japan’s credit rating untouched.

THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY

888 16th Street, N.W.Suite 740

Washington, D.C. 20006Phone: 202-861-0791Fax: 202-861-0790

[email protected]

WINTER 2011 THE INTERNATIONAL ECONOMY 13

DESMOND LACHMANResident Fellow, AmericanEnterprise Institute

The seriousness of anyintensification of theeurozone debt crisis

for the global economicrecovery should not beunderestimated. This crisishas the potential to deliver amajor blow to the European

banking system, which is the main holder of the Europeanperiphery’s US$2 trillion in sovereign debt obligations.

Over the next twelve to eighteen months, there is everyprospect that Greece and Ireland will choose to restructuretheir sovereign debt. They will do so as their economies sinkfurther into the deepest of recessions under the weight of thedraconian fiscal adjustment being imposed on these coun-tries by the International Monetary Fund and the EuropeanUnion within the straightjacket of their euro membership.

A Greek or Irish sovereign debt restructuring wouldconstitute the largest such restructuring in history. It wouldalso more than likely result in an escalation in contagion toPortugal and Spain, since both of these countries have extra-ordinarily large external financing needs in 2011.

A banking crisis in Europe, coupled with a renewedEuropean economic downturn, will have serious implica-tions for the global economic recovery. In particular, itwould heighten the risks of a petering-out in the U.S. eco-nomic recovery, since it would come at precisely a timewhen U.S. unemployment remains unusually high, the fore-

closure crisis continues unabated, and international oilprices are again at high levels.

A deepening in the European crisis must be expected toresult in a further weakening in the euro, which would putU.S. exporters at a competitive disadvantage, since it wouldheighten existential questions about the euro. It must also beexpected to result in an increased degree of global risk aver-sion given the great degree of interconnectedness of theworld’s financial system.

Likelihood of default or “haircuts” on the periphery?

Greece: �CertainIreland: �CertainPortugal: �CertainSpain: �Probable

Major industrial countries losing their top rating?

United States: �ProbableJapan: �CertainGermany: �Won’t happenFrance: �ProbableUnited Kingdom: �Probable

The check-marks tell the story,or at least my view of thestory. Too many words have

already been written as to the whysand wherefores. Praise the Lordand pass the ammunition.

Likelihood of default or “haircuts”

on the periphery?

Greece: �Certain

Ireland: �Certain

Portugal: �Certain

Spain: �Unlikely


United States: �Won’t happen

Japan: �Probable

Germany: �Won’t happen

France: �Unlikely

United Kingdom: �Unlikely

BARTON M. BIGGSManaging Partner, Traxis Partners

Praise the Lord andpass the ammunition.


SAMUEL BRITTANColumnist, Financial Times

bstinate refusal to write downdebt is the greater threat.

Alas, I don’t rate ratingagencies. The most important policyaim should be to free marketeconomies from bondage to finan-cial market prejudices.


Greece: �ProbableIreland: �UnlikelyPortugal: �ProbableSpain: �Probable


United States: �Won’t happenJapan: �Won’t happenGermany: �Won’t happenFrance: �UnlikelyUnited Kingdom: �Unlikely

LOUIS BACONFounder, Chairman, ChiefExecutive Officer, and Principal Investment Manager, Moore Capital Management

ROBERT K. STEELDeputy Mayor for EconomicDevelopment, New York City, andformer Undersecretary forDomestic Finance, U.S. Treasury


Greece: �CertainIreland: �CertainPortugal: �ProbableSpain: �Unlikely



Japan: �ProbableGermany: �UnlikelyFrance: �ProbableUnited Kingdom: �Unlikely


on the periphery?

Greece: �Probable

Ireland: �Probable

Portugal: �Probable

Spain: �Probable



Japan: �Unlikely

Germany: �Unlikely

France: �Unlikely


O


KARL OTTO PÖHLFormer President,

German Bundesbank


Greece: �UnlikelyIreland: �UnlikelyPortugal: �UnlikelySpain: �Unlikely


United States: �Won’t happenJapan: �Won’t happenGermany: �Won’t happenFrance: �Won’t happenUnited Kingdom: �Unlikely

There is growing evidence of accelerat-ing global recovery, and if there is asurprise this year, it might be that the

developed countries, led by the UnitedStates, will positively surprise. We may seea number of quarters of 3 percent to 4 per-cent or more real GDP growth in the UnitedStates. If this is correct, the size of some fis-cal deficits will come down as government

revenues grow and spending becomes lesspressured. In this context, I personallybelieve that the risk of government defaultsthreatening the recovery is a somewhatexaggerated fear. By the way, unless Imissed something, Japan lost its AAA statusmany years ago! If there were to be prob-lems, then the country that concerns memost is actually Japan, not the United States.

The risk of governmentdefaults threatening therecovery is a somewhat

exaggerated fear.

JIM O’NEILLChairman, AssetManagement, GoldmanSachs International


on the periphery?

Greece: �Unlikely

Ireland: �Unlikely

Portugal: �Unlikely

Spain: �Won’t happen

Major industrial countries

losing their top rating?

United States: �Unlikely

Japan: Already AA-


France: �Probable



TADASHI NAKAMAEPresident, NakamaeInternational EconomicResearch

Japan’s fiscal woes are nosecret, but its currency isthe strongest and its gov-

ernment bonds are the mostsecure, as witnessed by the factthat its yields are the lowest inthe world. Moreover, unlike

the United States, Britain, France, and Germany, Japan’s gov-ernment bonds are mostly held by domestic rather than foreigninvestors, who as stakeholders are unlikely to cause their coun-try to default on its debt.

Thus, if credit ratings truly reflect default risk, it is ridicu-lous that Japanese government bonds (JGBs) are rated AA-minus, while the other G4 countries are still rated AAA. Overthe past decade or so, investment banks and hedge funds haveconstantly tried to make money by short-selling JGBs (on theassumption that Japan’s fiscal troubles would cause yields torise), neatly enabled by credit rating agencies, whose reportsbacked up their beliefs. Yet these short sales rarely, if ever,turned out to be profitable as JGB yields sunk to ever-lowerrecord-breaking levels.

If credit rating agencies were to lower the ratings of theremaining G4 countries equal to that of Japan—or lower—they might regain some credibility and legitimacy.

As fiscal deficits balloon, countries become increasinglyincapable of funding their debt. This then shatters the myththat free-spending Keynesian demand-side policies are the

answer to today’s problems. For countries that can shift tosupply-side policies that enable the private sector to becomemore efficient and grow, this poses few problems. For coun-tries in the eurozone periphery, this means immense andpainful economic upheaval.

This turmoil will be reflected in the global economy.Europe’s economy and balance sheet is likely to deterioratefirst. The United States will probably be next. Japan’s declineis likely to be the slowest because it has already seen twentyyears of recession and has slowly started to implement struc-tural reform—something Europe and the United States haveyet to do.

HORST M. TELTSCHIKFormer President, Boeing Germany,and former National Security Advisorto Chancellor Helmut Kohl

HAR

ALD

DET

TEN

BOR

NLikelihood of default or “haircuts”

on the periphery?

Greece: �Probable



Spain: �Won’t happen



Japan: �Unlikely


France: �Probable

United Kingdom: �Probable


Greece: �CertainIreland: �ProbablePortugal: �CertainSpain: �Certain


United States: �ProbableJapan: Already AA-Germany: �ProbableFrance: �CertainUnited Kingdom: �Certain


If any of these events were to hap-pen within the next five years,there would be black headlines in

the financial press, but the worldwould move on. Any of these

events would cause some consternation, but none would bedevastating, and the global recovery would not be aborted onthese grounds. If the recovery were aborted for some otherreason, of course, the probability of these events would rise,since government revenues of all these countries would beadversely affected. Some “haircut” has already been pricedinto the public debt of the four eurozone countries, so debtholders could hardly argue that they were surprised oraggrieved. And the reputation of the rating agencies has beensufficiently compromised by their performance during 2006–09that any changes in ratings they make will be viewed with greaterskepticism than would have been the case several years ago.

RICHARD N. COOPERMaurits C. Boas Professor ofInternational Economics,Harvard University


Greece: �ProbableIreland: �UnlikelyPortugal: �UnlikelySpain: �Won’t happen


United States: �UnlikelyJapan: �UnlikelyGermany: �UnlikelyFrance: �UnlikelyUnited Kingdom: �Unlikely

Any increased prospect of sometype of default on the eurozoneperiphery—Greece more likely

than not, whereas Ireland, Portugal, and Spain are fifty-fifty—would temporarily send shockwaves through globalfinancial markets. It would further strain especiallyEurope’s undercapitalized banks, dampen European (andto a lesser extent, global) economic growth, and furtherstress monetary union.

Downgrades of sovereign debt of the major industri-alized countries—Japan has recently earned this dubiousdistinction, the others remain possibilities unless budgetsimprove—would likewise raise interest costs, worsenbudget balances, depress asset values, and slow growth.

Finally, these financial risks might just as well be theresult as the cause of slower global recovery, as publicdebt dynamics typically worsen in sluggish economies.

MICHAEL J. BOSKINTully M. Friedman Professor of

Economics and Hoover InstitutionSenior Fellow, Stanford University,

and former Chair, President’sCouncil of Economic Advisors


on the periphery?

Greece: �Probable

Ireland: �Fifty-fifty

Portugal: �Fifty-fifty

Spain: �Fifty-fifty



Japan: �Certain


France: �Unlikely



MAYA BHANDARIHead of Emerging Markets Analysis,Lombard Street Research


Greece: �ProbableIreland: �ProbablePortugal: �ProbableSpain: �Probable


United States: �UnlikelyJapan: �ProbableGermany: �UnlikelyFrance: �UnlikelyUnited Kingdom: �Unlikely

The answers are not independent. Spain, Greece,Portugal and Ireland are insolvent within EMU,at any feasible euro exchange rate, absent per-

manent, ongoing unrequited transfers todeficit countries (that is, currentaccount deficit countries). The only fea-sible candidate for making those trans-fers is Germany. The burden on Germany, were it toaccept that role, could be something like 8 percent of

German GDP—every year forever. Germany’scredit rating, and possibly its political stability,would not survive that. France has an unsustainable

current account deficit, but is almostcertain to be bailed out by Germany; itsdefault risk (though possibly not itsfirst-move ratings risk) is thus probably

smaller than Germany’s.Globally higher sovereign credit-risk premiums

would just mean a need for even lower “risk-free”real yields to sustain the continuing global Ponzigame, in which China is increasingly uncomfortablyaware that it will be called upon to play a role vis-à-vis the United States similar to the one EMU coun-tries want Germany to play. The underlying problemis a real-side one—dynamic inefficiency. The finan-cial bubble which is re-forming is one particularchannel through which dynamic inefficiency oper-ates. Even complete default/debt forgivenessthroughout the world would not resolve the problemof dynamic inefficiency.

BERNARD CONNOLLYCEO, Connolly Insight, LP

The answers arenot independent.


on the periphery?

Greece: �Certain

Ireland: �Certain

Portugal: �Certain

Spain: �Certain




Japan: �Certain


France: �Unlikely

United Kingdom: �Won’t happen


BENJAMIN M. FRIEDMANWilliam Joseph MaierProfessor of Political Economy,Harvard University


Greece: �UnlikelyIreland: �ProbablePortugal: �UnlikelySpain: �Won’t happen


United States: �ProbableJapan: �UnlikelyGermany: �Won’t happen

France: �Won’t happen

United Kingdom: �Probable

WENDY DOBSONFormer Associate Deputy Minister ofFinance, Canada, and Co-Director,Institute of International Business,Rotman School of Management,University of Toronto

Uncertainty about defaults inthe eurozone periphery isalready a drag on economic

recovery. Since Greece and Irelandhave defaulted in everything butname, let them get on with it—but

not just yet. Within the next year, their investors shouldhave had sufficient time to strengthen their balance sheets.That is when both governments should reduce principal andextend repayment terms to sustainable levels and get onwith their lives. Eurozone institutional arrangements are

inching towards dealingwith future fiscal crises,but faster movement isdesirable to ensure fiscaldiscipline in the firstplace. Voters in the twocountries have already

experienced painful austerity and now see public servicesdisplaced by debt servicing costs as far as the eye can see.The longer the delay, the more investor uncertainty andreluctance to acquire troubled country bonds which, in turn,shrink the investor pool and concentrate future risk.

Prospects in major countries are brighter because ofstrong government action (United Kingdom), strong fun-damentals (Germany), and domestic debt holders (Japan).In the United States, the noisy, often-surreal debate abouthow to cut debt and deficits may require a wakeup callfrom the markets in order to concentrate legislators’ mindson agreeing to a credible medium-term plan for fiscal con-solidation.

Uncertainty aboutdefaults in the eurozoneperiphery is already a dragon economic recovery.


Greece: �CertainIreland: �CertainPortugal: �ProbableSpain: �Unlikely


United States: �UnlikelyJapan: �Won’t happenGermany: �Won’t happenFrance: �Won’t happenUnited Kingdom: �Unlikely


EDWARD YARDENIPresident, Yardeni Research


on the periphery?

Greece: �Certain



Spain: �Unlikely




Japan: �Probable


France: �Unlikely


Economists, especially in Anglo-Saxon countries, have the per-sistent tendency to overlook the

determination of the eurozone poli-cymakers and the European CentralBank to defend the euro and itsmember countries. Regardless of theunproductive statements sometimesuttered by politicians in the core

euro countries who are moti-vated by domestic politics,the euro’s defenders wouldnever choose the suicide ofthe euro and the eurozone.

In the United States, thehigher savings rate of the household sec-

tor and the budget reductions likely by theRepublican-dominated Congress will improvethat country’s current account balance.

For Japan, confusion in Japanese politicswill not allow a reliable plan for budget reduc-tion in the medium term.

In the United Kingdom, Prime MinisterDavid Cameron is making respectable efforts

to tackle the budget deficits and the people areshowing the endurance to accept higher taxesand lower public services, so far. However, theinflation and the interest rate hikes on the hori-zon, together with severe budget cuts, mightcause serious shrinkage of the UK economy.

Confusion in Japanesepolitics will not allow a

reliable plan for thebudget reduction.

MAKOTO UTSUMIPresident and CEO, Japan CreditRating Agency, Ltd., and former ViceMinister of Finance for InternationalAffairs, Japan


Greece: �Won’t happenIreland: �Won’t happenPortugal: �Won’t happenSpain: �Won’t happen


United States: �Won’t happenJapan: �UnlikelyGermany: �Won’t happenFrance: �Won’t happenUnited Kingdom: �Unlikely

CATHERINE L. MANNBarbara ’54 and Richard M.Rosenberg Professor ofGlobal Finance, BrandeisInternational BusinessSchool, Brandeis University


As long as the United States, Japan, and the UnitedKingdom own their own central banks, they won’tdefault on their respective Treasury bonds out-

standing—which are denominated in dollars, yen, andpounds respectively. Each central bank can buy back itsown Treasury bonds by just “printing” money. Hencethere is long-run inflation risk but not default risk.

For Germany and France, the situation is more com-plex because theirnational central bankscannot directly printeuros. But Germany is amajor international creditor and France is probably, onnet balance, a creditor also. So I would not expect eitherto default on Treasury bonds outstanding.

The big threat to European recovery is that defaultson its periphery could restart a banking crisis. Germanbanks in particular have lent heavily to governments andfirms in southern and Eastern Europe.

The United States has a similar problem shouldthere be substantial defaults by its state and local govern-ments— particularly on their unsustainable defined- benefit pension plans. But municipal bonds are ownedmainly by wealthy individuals, and pensioners might beout of pocket. So defaults are much less likely to directlyimpact U.S. banks.

RONALD MCKINNONProfessor Emeritus ofInternational Economics,Stanford University


on the periphery?

Greece: �Probable


Portugal: �Probably

Spain: �Unlikely



Japan: �Won’t happen




Defaults could restarta banking crisis.

Under this scenario—Greece andIreland restructure, Portugalmaybe, but everyone else mud-

dles along—the global economy actu-ally does better than if Greece,Ireland, and Portugal keep on rollingover debt that won’t be repaid. Theexperience of Latin America in the1980s is instructive. Giving up on theBaker liquidity plan and restructuringthe debt according to the Brady Plancreated the foundation for renewedlending and growth in Latin America.Like the Brady Plan, the EuropeanFinancial Stability Facility shoulduse guarantees, not outright pur-chases of sovereign obligations.Guarantees are a much more effi-cient use of limited funds.


Greece: �CertainIreland: �CertainPortugal: �UnlikelySpain: �Won’t happen


United States: �Won’t happenJapan: Already AA-Germany: �Won’t happenFrance: �Won’t happenUnited Kingdom: �Won’t happen


JEAN-PIERRE PATATAdvisor, Centre d’EtudesProspectives etd’InformationsInternationales, and ThierryApoteker Consulting

Greece will probablybe downgraded,considering the

heavy burden of its debtand poor prospects for economic growth. At themoment, Greek debt is protected by the EuropeanFinancial Stability Facility with a deadline of2013. After this, the fund will be replaced by a per-manent new organization. But efforts by creditorsto make settlements cannot be ruled out. Irelandand Portugal have better growth prospects. Theexistence and apparently the brilliant start of theEFSF lend it high credibility. Ireland and Portugalhave two years during which they can benefit fromthis credibility and prove that they can managesound economic and fiscal policy.

Spain is unfairly put in the disagreeable PIGScategory. Spanish sovereign debt is less importantthan most other advanced economies’ debts. Ofcourse, private debt is high and the current accountlargely umbalanced, but Spain’s economy can ben-efit from an improvement in the real estate market.Its international banks are solid and well-managedand the government has begun a severe programfor reducing deficits.

The UnitedStates has a very badfiscal situation andthe government hasfailed to take mea-sures to improve it.

But rating agencies will never take the risk ofdowngrading the country which issues the majorinternational reserve currency—and with whichthey do so large a part of their business.

Japan was just downgraded to AA-minus. Isfurther downgrading possible? This country has byfar the heaviest sovereign debt among big industri-alized economies. Even if domestic saving isimportant, Japan’s economic growth is hesitantand its policy situation sometimes blurred.

For Germany, everything is possible, includingthe worst (that is the secret motto of centralbankers!). But a spectacular policy and/or eco-

nomic reversal in this country is, obviously,unlikely for the next three and even five years.

France’s sovereign debt is average for anindustrialized country and even lower if one takesinto account the retail pension burden (France’sdemographic situation is better than that of othercountries). But its policy for reducing deficits ismuch too timid and political consensus on publicfinances, globalization, and markets is not evident.

The United Kingdom has been suffering fromspectacular deterioration of its economic and fiscalsituation which could justify questions about itsrating. But the government has engaged in a verysevere and credible plan for reducing deficits. Inaddition, playing host to the largest financial andmoney markets in the world is strategic protection.

An increased prospect of default in the euro-zone periphery would not have a significantimpact on recovery, considering the weak shareof Greece, Portugal, and Ireland in the globalGDP, and if the successor in 2013 to the EFSF iscredible.

The loss of triple-A ratings for major industri-alized countries could encourage new fiscal cut-backs and, theoretically, have some impact oneconomic growth, especially if the United States isconcerned, but in my opinion this country will notbe downgraded. If other counties lose their rating,the exact reasons are important, otherwise ratingagency credibility could be questioned.Nevertheless, it is uncertain such an issue couldhave significant impact on fiscal policies if eco-nomic growth remains weak.


Greece: �ProbableIreland: �UnlikelyPortugal: �UnlikelySpain: �Unlikely


United States: �Won’t happenJapan: Already AA-Germany: �Won’t happenFrance: �UnlikelyUnited Kingdom: �Unlikely

The United Stateshas a very badfiscal situation.


JAMES E. GLASSMANManaging Director andSenior Economist,JPMorgan Chase

When it comes toassessing the cred-itworthiness of the

large industrial economies,the global bond market isthe only “rating agency”that matters. Bond

investors must weigh all manner of risks, polit-ical and economic. For that reason, the histori-cally low level of real interest rates on thesovereign debt of the large industrialeconomies implies that bond investors must beassuming that the fiscal picture for many willimprove as the global economy recovers.

It is very unlikely that any of the periph-ery countries will default on their outstanding

debt. The Europeanseventually will trans-form the EuropeanFinancial StabilityFacility into a moreeffective mechanismfor dealing with liq-

uidity strains. Economic recovery will restoresome fiscal balance in the region, as it will inthe United States. The alternatives would beless disruptive, such as developing a fiscaltransfer mechanism or subsidizing the interestrates a sovereign must pay.

The long-term consequences of defaultare more punishing than the alternatives.There is a deep historical and political com-mitment to the monetary union and the euro,which has brought many benefits to the euro-zone, and a default by one of the members,and inability of the members to prevent it,would call into question the euro’s survivabil-ity. A default could easily trigger a widerfinancial crisis across the region, harmingeven the strong economies. And these coun-tries will take sufficient action to address their

structural fiscal deficits, enough so to be cred-ible to financial markets.

On the probability that the rating agen-cies will lose their top ratings—oops, that themajor industrial economies lose theirs—highly unlikely, because the fiscal erosion islargely the result of deep economic reces-sions (cyclical factors) and the global recov-ery now in place will begin to restore fiscalbalance. This will be seen as a positive devel-opment by the rating agencies. (I am not sureif a downgrade of industrial country debtwould carry much meaning for financial mar-kets, because default by these countries isassumed to be negligible.) The recent down-grade of Japan’s debt (and possible down-grades of other large countries), given thebreadth and depth of the investor appetite forsovereign debt of the big players, is likely tocreate more noise in the media than in thefinancial market.

A default in the eurozone would be pun-ishing, not only for Europe but also for theglobal economy, which is a strong argumentagainst taking such an action. It wouldrequire the defaulting party to implementausterity measures, with negative implica-tions for growth.


Greece: �UnlikelyIreland: �UnlikelyPortugal: �UnlikelySpain: �Unlikely


United States: �UnlikelyJapan: �UnlikelyGermany: �UnlikelyFrance: �UnlikelyUnited Kingdom: �Unlikely

The global bondmarket is the only“rating agency”that matters.


NORBERT WALTERWalter and Töchter Consult, andChief Economist Emeritus,Deutsche Bank

The world is in for higherreal rates of interest(financing costs) than

over the last few years. Andfor good reason: There will be more differentiation offinancing costs between governments and companies.

However, the present focus on some countries indeep trouble (due to mismanaged banks or inflated realestate/construction sectors) is misplaced. Some, like

Ireland, have a strong constitu-tion and can and will grow outof their problems. Others, who

still do not understand that being on drugs may makeyou “high” but not “sound,” will soon have to swallowbitter medicine and will thus fall below in trend growthfor a number of years. This is not just true for Spain, butfor the United States.

But misperceptions about rating countries go fur-ther. Quite a few countries today perceived to be naturalcandidates to act as donor countries in international res-cue operations are heading toward unsustainable fiscalpositions, particularly because of their imminent demo-

graphic decline.Thus, Germany clearly is overrated. And by 2020—when China still is anything but rich—it will ageaggressively. Today’s sobering views about financialprospects foreshadow an unattractive future for morethan just the short term. Goldilocks is over, for good.


Greece: �ProbableIreland: �ProbablePortugal: �UnlikelySpain: �Unlikely


United States: �ProbableJapan: �ProbableGermany: �UnlikelyFrance: �UnlikelyUnited Kingdom: �Unlikely

Goldilocks is over.

BOWMAN CUTTERSenior Fellow,

Roosevelt Institute


on the periphery?

Greece: �Certain

Ireland: �Certain

Portugal: �Probable

Spain: �Unlikely



Japan: �Unlikely


France: �Unlikely



The increased precariousnessof sovereign debt, coupledwith the extensive EU inter-

bank holdings of this debt, arelikely to slow global economic recovery. Two other effectsare no less important but with more ambiguous conse-quences for recovery.

First, the jeopardy to debt repayment and to bond rat-ings is likely to result in lower priority accorded in OECDcountries’ budgeting processes to “stimulus”spending than to so-called “austerity,” thatis, to curtailing government spending. Aconcomitant effect among economists and

bankers will be diminished attention to the Keynesianlegacy of the “multiplier,” and increased attention tohow to affect the crucial as well as more elusive state of confidenceand expectations in global markets. While this change may dampen thepace of recovery, it’s also likely to enhance the recovery’s robustness.

Second, the worries that adhere to EU and U.S. Treasury bondsare likely to encourage and accelerate China’s efforts to make the ren-minbi an international currency. A consequence of recent events inundermining the dollar’s primacy as the world’s favored reserve cur-rency and its predominance as the invoicing currency of first recoursewill be to boost receptivity among global bankers and traders toChina’s efforts on behalf of the renminbi.

CHARLES WOLFSenior Economic Adviser and

Distinguished Corporate Chair inInternational Economics and

Professor, Pardee Rand GraduateSchool, RAND, and Senior Research

Fellow, Hoover Institution

Recovery islikely to be slowed.


on the periphery?

Greece: �Unlikely



Spain: �Unlikely




Japan: �Won’t happen


France: �Unlikely


DAVID K.P. LIChairman and Chief Executive,Bank of East Asia, Limited


Greece: �ProbableIreland: �ProbablePortugal: �UnlikelySpain: �Unlikely


United States: �UnlikelyJapan: �UnlikelyGermany: �Won’t happen

France: �UnlikelyUnited Kingdom: �Unlikely


ROBERT J. SHAPIROChairman, Sonecon, LLC, and former U.S. Under Secretary of Commerce for Economic Affairs

Without the extraordinary interventions ofthe European Union and theInternational Monetary Fund, Greece

already would be in default and Ireland would beon the edge of doing so. The irony here is thatdefault has been staved off thus far by the politicalcommitment of Germany and France to the euro—yet the rules of the eurozone prevented Greek andIrish policymakers from taking normal steps toavoid default and rebuild confidence through cur-rency devaluations and interest rate adjustments.

The differences between the two countries’predicaments, however, are also instructive. Theseeds of Greece’s problems lie in years of fiscal

profligacy, which initself was a politicalresponse in order tomaintain employmentwhile the eurozoneprecluded their usinginterest rate and cur-rency policies toimprove their competi-tiveness. Dublin, by

contrast, has been a model of fiscal responsibilityfor years; but like the United States, lax oversightof the domestic financial system allowed the coun-try’s dominant financial institutions to pursue reck-less overleveraging built helter-skelter on a hugehousing bubble.

When the U.S. financial crisis and subsequentdeep recession reached Greece and Ireland, theGreeks found themselves with unmanageable pub-lic debt while Irish banks quickly turned insolvent.And in both cases, the fiscal austerity required to

slow the two countries’ fast- rising debt burdens hasproved to be politically difficult, if not impossible.It’s also economically counterproductive, since thecutbacks stall the growth needed to generate therevenues to stave off or at least limit the extent of adefault.

There is no prospect of default by the UnitedStates, Germany, or France, and virtually noprospect of such a dire development in Japan orthe United Kingdom. All have fundamentallysound economies, as financial markets recognize.Long-term interest rates remain historically low inall of these countries, signaling investors’ confi-dence in their long-term solvency. All of thesenations also have mature political systems capableof quickly addressing any impending debt crisis,as each has demonstrated in the past when deficitshave expanded sharply.

However, a special caveat applies to theUnited States. As the only nation of the groupwithout parliamentary arrangements, there is a the-oretical possibility of a politically driven default ifthe political opposition were to block an increasein the legal debt limit. However, this almost cer-tainly is an empty threat. Congressional opponentsof sitting presidents have threatened such actionmany times in recent decades, and the presidenthas won the debate and the fight every time.

The rules of theeurozone preventedGreek and Irishpolicymakers fromtaking normal stepsto avoid default.


Greece: �CertainIreland: �CertainPortugal: �ProbableSpain: �Probable


United States: �Won’t happenJapan: �UnlikelyGermany: �Won’t happenFrance: �Won’t happenUnited Kingdom: �Unlikely


MURRAY WEIDENBAUMMallinckrodt DistinguishedUniversity Professor,Washington University in St. Louis

Continued internationalconversation on weak-nesses in sovereign debt

is bound to have a depressing effect on the finances ofmarginal economies in southern Europe, if not else-where. This negative impact may be offset in part bythe continued economic strength of Germany and alsothe United States.

Practical reasons will inhibit the rating agenciesfrom seriously contemplating downgrading theTreasury issues of the United States These agenciesmay have escaped tough government oversight forthe time being. However, substantial discussions ofdowngrading Treasuries could lead congressionalcommittees and perhaps some regulators to initiateinvestigations and public hearings. Any sensiblemanagement would try to avoid opening itself tosuch potential problems.

Thus, for the major industrialized nations, mud-dling through is the most likely outcome. The

United States will not lose its triple-A rating for sov-ereign debt and such an eventuality is unlikely forGermany, France, the United Kingdom, and Japan.

The peripheral countries will not all enjoy suchluxury. Haircuts are initially certain for Greece andPortugal and, to a lesser degree, probably for Irelandand Spain.

JAMES CAPRACapra Asset Management


Greece: �CertainIreland: �ProbablePortugal: �ProbableSpain: �Won’t happen


United States: �UnlikelyJapan: �UnlikelyGermany: �Won’t happen




Greece: �CertainIreland: �ProbablePortugal: �CertainSpain: �Probable


United States: �Won’t happenJapan: �UnlikelyGermany: �UnlikelyFrance: �UnlikelyUnited Kingdom: �Unlikely

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Winter 2011international-economy.com/TIE_W11_SovereignDebtSymp.pdf · 2012. 6. 25. · Title: Winter 2011 Created Date: 20120625165512-05'00