2015 August 06 Thursday
Next Recession To Cause Chain Of Sovereign Defaults?

Jeremy Grantham thinks a big market downturn in 2016 could trigger a chain of defaults on sovereign debt.

I've made similar comments recently:

Check out this chart of sovereign debt levels of OECD countries from 2008 to 2015. Note the 2008 and 2015 amounts. Add a new crisis. Those countries will enter the next recession starting with much worse debt level, slower GDP growth rates, even more aged populations. A lot of Euro zone countries would default if we had a repeat of 2008. Add 20-30-40% of GDP to each country's sovereign debt load. Even a normal recession will push Italy, Portugal, and Ireland close to the Greece zone.

The European countries are at most risk of default because they gave up their own currencies, have rapidly aging populations, anemic economies, and social welfare states. They are also importing bigger lower classes. The European social welfare state is failing.

Going into the last recession it was possible to drop interest rates to provide some economic stimulus. Central banks can't do that next time around because interest rates are already low. I hope we can avoid the next financial panic for several years because governments are financially in bad shape.

Share |      By Randall Parker at 2015 August 06 07:13 PM 


Comments
Abelard Lindsey said at August 7, 2015 8:28 AM:

Japan is at risk.

JerseyGuy said at August 7, 2015 8:10 PM:

Randall,
Are there any movements in Europe that are looking to push back against the welfare state? If not, what country do you think spawn a movement to do that?

By the way, if you look at the Northern European personal debt levels (Netherlands, Norway, etc.), they are extremely high. In fact, they are higher than the US. My guess is that they are trying to maintain a high standard of living under very high taxes. Maybe there will be a pushback there as well?

Randall Parker said at August 7, 2015 8:45 PM:

JerseyGuy,

As far as I am aware the growth of right wing parties in Europe is being fueled by immigration, not so much by desire to cut the welfare state. I expect most of the welfare state rollback in Europe to come as a result of economic crisis. The rollback will only shrink the welfare state as much as is needed to free up money for sovereign debt interest payments.

It is possible that as immigration makes Europe more ethnically diverse support for the welfare state will go down. Ethnic loyalty is what makes the European welfare state so big in the first place. On the other hand, the immigrants will vote for the welfare state. Look at lower class immigrant vote for Labour in Britain for example.

Brett Bellmore said at August 8, 2015 3:40 AM:

"Next" recession? For a good deal of the world, it will be "next STAGE in the recession". In fact, in the US it's kind of mixed in place. A large part of the population is still in the recession, even as a minority have escaped it. Labor participation rates tell the story; They peaked in the 1990's, and have now fallen back to pre-1980 levels, and may still be dropping. All the drop in unemployment has been due to people leaving the labor force, not job creation.

The economy is bifurcating like wild, and the larger part is doing very badly. Averages are being used to conceal this. The split apparently took place in the late 1990's.

Wolf-Dog said at August 10, 2015 4:36 PM:

It is curious that in that chart of sovereign debt levels as a percentage of the GDP, Sweden is only 48.3 %, Denmark is 59.3 %. One would expect such entrenched welfare states to have much higher debt levels. But the US is 106.9 % and UK is 106.5 %. To add insult to injury, the debt level of Japan is 232 %.


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