Magazine article The International Economy

The Year of the Sovereign Debt Crisis

Magazine article The International Economy

The Year of the Sovereign Debt Crisis

Article excerpt

TIE ASKED a number of top thinkers to focus on the outlook for sovereign debt. How likely are countries in the eurozone's periphery (Greece, Ireland, Portugal, and Spain) to default outright or face significant "haircuts" on their sovereign debt over the next three to five years? What is the probability in the next three to five years that any of the major industrialized countries (the United States, Japan, Germany, France, and the United Kingdom) lose their top ratings *? And how might the increased prospect of default in the eurozone periphery and the loss of triple-A ratings in the major industrialized countries affect the global economy?

[ILLUSTRATION OMITTED]

DESMOND LACHMAN

Resident Fellow, American

Enterprise institute

The seriousness of any intensification of the eurozone debt crisis for the global economic recovery should not be underestimated. This crisis has the potential to deliver a major blow to the European banking system, which is the main holder of the European periphery's US$2 trillion in sovereign debt obligations.

Over the next twelve to eighteen months, there is every prospect that Greece and Ireland will choose to restructure their sovereign debt. They will do so as their economies sink further into the deepest of recessions under the weight of the draconian fiscal adjustment being imposed on these countries by the International Monetary Fund and the European Union within the straightjacket of their euro membership.

A Greek or Irish sovereign debt restructuring would constitute the largest such restructuring in history. It would also more than likely result in an escalation in contagion to Portugal and Spain, since both of these countries have extraordinarily large external financing needs in 2011.

A banking crisis in Europe, coupled with a renewed European economic downturn, will have serious implications for the global economic recovery. In particular, it would heighten the risks of a petering-out in the U.S. economic recovery, since it would come at precisely a time when U.S. unemployment remains unusually high, the fore closure crisis continues unabated, and international oil prices are again at high levels.

A deepening in the European crisis must be expected to result in a further weakening in the euro, which would put U.S. exporters at a competitive disadvantage, since it would heighten existential questions about the euro. It must also be expected to result in an increased degree of global risk aversion given the great degree of interconnectedness of the world's financial system.

Likelihood of default or "haircuts"
on the periphery?

Greece:    [check] Certain
Ireland:   [check] Certain
Portugal:  [check] Certain
Spain:     [check] Probable

Major industrial countries
losing their top rating?

United States:   [check] Probable
Japan:           [check] Certain
Germany:         [check] Won't happen
France:          [check] Probable
United Kingdom:  [check] Probable

[ILLUSTRATION OMITTED]

BARTON M. BIGGS

Managing Partner, Traxis Partners

Praise the Lord and pass the ammunition.

The check-marks tell the story, or at least my view of the story. Too many words have already been written as to the whys I and wherefores. Praise the Lord and pass the ammunition.

Likelihood of default or "haircuts"
on the periphery?

Greece:      [check] Certain
Ireland:     [check] Certain
Portugal:    [check] Certain
Spain:       [check] Unlikely

Major industrial countries
losing their top rating?

United States:   [check] Won't happen
Japan:           [check] Probable
Germany:         [check] Won't happen
France:          [check] Unlikely
United Kingdom:  [check] Unlikely

LOUIS BACON

Founder, Chairman, Chief Executive Officer, and Principal Investment Manager, Moore Capital Management

[ILLUSTRATION OMITTED]

Likelihood of default or "haircuts"
on the periphery? … 
Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.