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Sovereign Debt: An Evolving Global Drama

By Arnold Bock      Printer Friendly Version Bookmark and Share
Apr 28 2010 9:15AM

If the implications of the recent Greek tragedy were not so serious it would have been seen more as a Greek comedy (of fiscal errors). In fact, however, to deploy another metaphor, Greece's sovereign debt is seen as the proverbial canary in the coal mine - a microcosm of the relentlessly growing sovereign debt that has taken much of Europe by storm and is threatening to spread to the U.S.

Fifteen other member nations comprising the Euro currency club have recently saved colleague Greece from defaulting on its debt...for now. This comes after an elongated period of tug and push during which Euro nations demonstrated their inability to agree on a concerted course of action. That has recently changed and Greece will now get$40 Billion in a 3 year loanat 5% interest (which is much lower than the prevailing interest rate) to help pay down their existing and ever increasing debt and the International Monetary Fund will back-stop a further $20 Billion should it be needed.

On the surface, this solution is just what any Keynesian economist, in good standing with his fraternity brethren, would advocate because, as part of the bargain, Greece has agreed to implement a variety of painful spending constraints which will result in a much reduced standard of living for its people.  In spite of such action, however, Greek debt will continue to grow to 150 percent of GDP by 2012.

Unfortunately, however, this new bailout provokes and perpetuates a series of errors because Greece cannot, and will not, be extricated from its debt tomb. According to the UK Telegraph, Greece will now be doomed to transferring to foreign creditors an amount equal to 8 percent of its GDP in perpetuity...much more than German reparations to foreign creditors after WWI.  It cannot, and will never, be repaid.

Further proof that these loans will provide only temporary relief is recent research by economists Carmen Reinhart and Kenneth Rogoff in their new book “This Time is Different: Eight Centuries of Financial Folly.?  They concluded that when sovereign debt exceeds a level of over 80 percent of its GDP, that debt grows ever more rapidly invariably pushing the country into financial default.

If we are to take the Reinhart/Rogoff research at face value then all that this recent bailout of Greece has done is buy it sometime before its inevitable financial default.  It also allows Euro countries, the IMF and other agencies and persons with responsibilities for debt issues to work their magic. Moreover, it conveys hope to other countries on the brink of financial collapse. It defers the calamity and appeals to the overwhelming need of politicians everywhere to avoid and escape responsibility, if only to have the debt implosion occur on someone else’s watch.

While the temporary hiatus given to Greece should be characterized as default deferral, it also, unfortunately, sets a highly dangerous precedent. Each of the next Euro default candidates - Portugal, Spain and Italy - comprise of much larger economies which will therefore require substantially greater levels of assistance. Of course, fairness willdemand that they too receive an equivalent boost from their Euro partners and backstopping by the IMF.

A closer look at bailout details brings to light something else which should raise serious concern. Who are the foreign creditors which Greece is having difficulty paying?  While the current bailout originates among the taxpayers of the sixteen member nations of the Euro group, the existing debt which is in danger of default is held by foreign banks...not foreign nations. These foreign banks are headquartered in France, Germany, Switzerland, the UK and elsewhere. A short list includes Credit Agricole and Germany’s Landesbanken.

This begs a few unanswered questions:

  1. Is this agreement a Greek government bailout or is it an indirect bailout of foreign banks by their own governments under the guise of loans to the government of Greece?
  2. Will this Greek script be played out on the stages of other Euro nations? 
  3. Will it spread to the United States?

US national debt now stands at $12.78 Trillion, more than twice as large as it was in the year 2000. Even the President Obama’s budget director admits that the on-budget debt level will reach close to $20 Trillion by 2020, almost double over what it was just over one year ago. The non-partisan Congressional Budget Office says it will be even higher.

As major as those debts are, however, the genuinely mind-boggling debt projections are the future commitments to citizens for such services as Social Security and Medicare, as well as a myriad of additional federal government obligations. These Unfunded Contingent Liabilities are now well beyond the $100 Trillion level. Some calculate the number is closer to $137 Trillion. Remember that these pending expenditures are the unfunded portions. No money has been set aside, just another promise.

It has been calculated that the net present value of these future budget needs is in the neighbourhood of $35 Trillion. What that means is that $35 Trillion of 2010 dollars would be required today in order to invest to meet the $137 Trillion United States government responsibilities to its citizens in the years ahead.

Combine the current budget debt of $12.78 Trillion with the $35 Trillion net present value for future obligations, then add in $1.5 Trillion of continuing annual deficits for as far as the eye can see and factor in future rising interest rates from their current multi-generational lows and it is clearly evident that America's debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal - even disastrous.

As long as bond creditors retain a modicum of confidence in the respective debtor nations, the play - the 'Greek' tragedy - can continue for awhile longer, maybe even indefinitely. However, should interest rates spike northward or external events affect regional economies or the entire global financial system, it is highly likely we will witness a sudden unscripted end. On the other hand, creditor confidence supplemented by modest economic gains, strengthened by politicians who exhibit vision and serve tough love to their respective electorates, just might allow a muddle through scenario to take root.

Given the magnitude of existing debt and projected future growth in debt worldwide, it is entirely reasonable to conclude that we will experience a plethora of game-ending debt defaults in the not too distant future. This 'Greek' tragedy will likely open first in Athens, Greece and then play in many of the capitals throughout Europe before a joint grand finale in New York and Washington. Readers are reminded to consult the financial pages for the specific location and time of this major event.

What do individuals do to protect themselves from sovereign debt defaults, rampant growth in the money supply and currency devaluation stemming from inflation or hyperinflation? Quite simply, anyone's priority safe haven protection is precious metals. Gold and silver in the form of bullion and select precious metals mining stocks should be the go to investment of choice. There is no better protection available.

Arnold Bock



Arnold Bock is a frequent contributor to, the site for sore eyes and inquisitive minds, and comments regarding his article can be made by visiting said site or sending an e-mail to