Governments the world over have spent the past year bailing out, backstopping, insuring, and stimulating their financial sectors and economies throwing around trillions of dollars, euros, yen, and pounds like Halloween candy. Officials have assured us there’s little risk to that strategy but I believe that the opposite is true – that if you borrow and spend too much, all you’re going to do is transform a Wall Street debt crisis into a Washington debt crisis. Words: 882
In further edited excerpts from the original article* Mike Larson (www.moneyandmarkets.com) goes on to say:
Lo and behold, the bill for all this global fiscal and monetary largesse is beginning to come due. Debt and deficit problems are going from bad to worse in many nations. That’s raising the very real risk of the unthinkable: widespread SOVEREIGN debt defaults!
The first shot across the bow came when the tiny emirate of Dubai dropped a bombshell on the markets. A government-backed holding company, Dubai World, warned that it needed to restructure $26 billion in debts – all $26B – tied to its property development arm Nakheel PJSC and other subsidiaries.
Am I surprised? Not in the least. The Dubai debt crisis was a long time coming but the troubling thing is that Dubai is NOT alone.
Greece is part of the European Union, and it’s rapidly sliding down the slope toward default. Its budget deficit has exploded to 12.7 percent of GDP, the worst in the 27 EU countries, while its outstanding public debt load is on track to hit 125 percent of GDP in 2010.
In order to avoid stiff EU sanctions and penalties, Greece is slashing its operations budget by 10 percent. The government is also planning a 2010 hiring lockdown and a partial public salary freeze. Greece’s Finance Minister George Papaconstantinou says there is “absolutely” no default risk but those measures don’t appear to be comforting investors.
The Athens Stock Exchange General Index has plunged. Meanwhile, Greece’s two-year government debt has dropped in price by the most in 11 years. Fitch has already cut Greece’s sovereign debt rating to “BBB+.” That’s the third-lowest investment grade rating. Standard & Poor’s rates Greece “A-,” but that rating may be lowered soon.
Bottom line: We’re facing the very real possibility of a significant sovereign debt default or bailout in Europe.
At times like these, investors naturally ask themselves where the next domino might fall. My answer: How about Spain? S&P has lowered its credit outlook for that country to negative from stable. The ratings agency cited “pronounced deterioration” in the country’s public finances.
Spain is in trouble because it experienced its own gigantic housing bubble, one that has long-since popped. Unemployment is on track to top 20 percent in 2010, while the nation’s deficit is swelling toward 11 percent of GDP. The economy has shrunk for six straight quarters, prompting the government to spend billions of dollars to stimulate growth.
Then there’s the U.K. Its budget deficit is running at 12 percent of GDP, the highest in the Group of 20 community of nations. That’s forcing the government to impose a 50 percent tax on banker bonuses, and to boost income taxes. Despite those moves, the U.K. Treasury is still going to have to borrow billions more pounds than it originally planned to fund its deficit.
What about us? The fiscal 2009 budget deficit here soared to $1.4 trillion, the worst ever. That was equal to 9.9 percent of the overall economy — almost triple the level of a few years ago and the highest in the nation’s history, excluding years where deficits were bloated by massive war spending (à la World War II). Over the next decade, the Congressional Budget Office projects an additional $7.2 trillion-plus in red ink.
We are now borrowing record amounts of money, week in and week out, to underwrite our profligacy. Our debt load is rising so fast, Congress has had to raise the so-called debt “ceiling” yet again. Everyone knows the cap is a joke. Every time we come close to tagging it, lawmakers just raise it again but the frequency and size of those increases is getting totally out of control.
Nobody expects the U.K. or U.S. to lose their AAA debt ratings anytime soon but Moody’s has warned in a report that both countries’ ratings are at more risk than those in other triple-A rated countries like Germany and France and I don’t see any credible plan coming out of Washington to get our disastrous budget situation under control.
Given this environment, my advice for investors is simple: avoid investing in regions where sovereign credit risk is rising. Focus instead on countries where government debt and deficits are NOT a major threat such as China, Brazil, and Australia who are generally sitting on massive reserves, seeing healthy growth, and otherwise prospering.
You may also want to think about lightening up your risk a little bit.
*http://www.moneyandmarkets.com/sovereign-debt-defaults-the-next-shoe-to-drop-2-36832 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)