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looming black cloud of government debt

NINJA Loans, CDOs and MBSes have been assumed or guaranteed by Sovereign Governments. Junky commerical debt has become somewhat less junky government debt.

Mark McQueen writes in a recent article on SA - in which he quotes RBC’s U.K.-based Fixed Income and Currency Strategy Research Group which talks about  the looming black cloud of government debt that is about to replace the financial systems troubled debt.

Here's a snippet [emphasis mine]

  • Budget deficits are rising rapidly in the major economies.
  • The damaging effects on public finances of the deepest downturn in global activity for seventy five years are being reinforced by a combination of the loss of exceptional revenue flow related to asset price booms, discretionary fiscal policy easing and large scale financial sector bail outs.
  • As a consequence, net government debt/GDP ratios have begun to soar. Even on optimistic assumptions, in a number of industrial economies, debt burdens stand to be rise by anything from a third to almost 100% over the next five years. On less optimistic assumptions, the prospective debt dynamics are truly explosive.
  • The greatest concerns relate to the U.S., the U.K. and Japan, while Canada, Australia and New Zealand appear to be in rather better shape. The Eurozone stands somewhere in between.
  • The prospective surge in public sector debt will swell interest payments, limit the further use of fiscal policy for the purposes of macroeconomic stabilisation, exert upward pressure on Treasury bond yields, boost the risk premia on currencies and increase the incentive for governments to monetise debt and boost inflation.