No sovereign debt can be considered completely immune to default, according to former Monetary Policy Committee member and Citigroup chief economist Willem Buiter.
A recent study by the International Monetary Fund said that sovereign default was “unnecessary, unlikely and undesirable” but Buiter argues that even the G7 nations’ debt does have risk attached.
He says: “We still consider it unlikely that there will be a sovereign default during the next five years by more than a couple of advanced economies but no sovereign debt can and should be considered completely safe.”
Buiter says a combination of increased public spending demands in Western economies, coupled with large public debts and less efficient tax systems, mean any advanced economy debt could default. He cites the example of Germany, which thanks to its current debt and deficit levels, would not be able to join the Euro area today.
He says: “The common practice among financial analysts of treating the term structure of interest rates on the sovereign debt of most advance industrial countries as being free of default risk is no longer appropriate, if it ever was.”
As a result, Buiter argues that Western private firms are likely to have better ratings than their sovereigns and in turn will be able to “trade through” its sovereign’s debt, offering a lower yield.
He says: “The capacity to tax has been eroded in a number of advanced economies to the point that we may well see a higher incidence of private entities from the advanced economies ‘trading through the sovereign’, returning us to the way the world was before the broad-based income taxes and sales taxes became part of the normal economic landscape.”
This comes as HM Revenue & Customs revealed today that the UK tax gap rose to £42bn in 2008/9.