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Against the tide: Sovereign debt crisis – Beyond the death zone

There is no easy way out of the overleveraged situation many governments have got into. A sovereign debt crisis looms, and not just for the most profligate.

The Greek debt saga reveals a serious risk of a global sovereign debt crisis. Global public sector debt has soared to unsustainable levels as central banks and governments have tried to mitigate the impact of private sector deleveraging. But markets are now waking up to this. They are focusing on those sovereigns with large debt burdens and are beginning to price their paper accordingly.

There are many differences between the economies of the so-called Piigs (Portugal, Ireland, Italy, Greece and Spain) and the larger G7 economies – almost as many as the differences between sub-prime and prime mortgages. However, there is one common denominator – excessive leverage.

Government debt to GDP ratio*

Projections for advanced G20 economies’

Note: * IMF forecasts based on impact on debt from automatic stabilisers, fiscal stimulus, financial sector support.

Source: IMF

It is baloney that the policymakers swapped public-sector debt for private-sector debt to combat the credit crisis. Rather, they added a high level of public-sector leverage to an almost unaltered level of private-sector debt to create a super-overleveraged situation.

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