Other sovereigns no different to Greece, says SocGen
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Repeats of the Greek debt crisis could happen all over the world, according to Societe General.
In an asset research note, SocGen analyst Dylan Grice argues that many other nations look as vulnerable if not more so when debt obligations are assessed against forecast budget deficits in many countries including the UK.
Grice says: “Greece is the beginning of a wave of government funding crises, not the end.”
By taking Bloomberg’s data for existing debt maturity for each government and using the Organisation for Economic and Co-Operation and Development’s projected 2010 deficits as a proxy for net new debt issuance, Grice argues that most developed nations have bigger future problems than Greece, excluding the UK which has a significantly higher debt maturity date than most developed nations.
Grice says: “If it can happen in Greece, it can happen everywhere else too, because Greece just isn’t that different.
“What counts is confidence, and what hurts is when weakening confidence pushes up the market risk premia on a country’s debt, pushing bond yields and therefore interest costs to such a level that government finances becomes unsustainable.”
Grice notes that debt sustainability relies on the interest a country pays on its debt must equalling the nominal growth rate of that country: “If it doesn’t, a shortfall develops between incremental revenues and incremental coupon payments and in the absence of further austerity, more debt is required to finance the deficit,” he says.
SocGen argues that continuing debt issuance and obligation without measures to reduce deficits will scare the markets and create a run on nations’ sovereign debts, similar to those seen on Greek debts over the last three months.
Grice says: “For the most chilling similarity between the Greeks is that we too are as helplessly vulnerable to any reassessment of sovereign risk by the famously fickle Mr Market. The Greek tragedy of being unable to pay for the debt built up during the years of unprecedented low yields reads across to the rest of our governments all too well. The fact is most of us are living on the same knife edge.”
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