The recent downgrades of the debts of Spain and Portugal highlight the risks; the debt rating agencies have sent a signal with the recent downgrades of the debts of Spain and Portugal—one certain outcome. Heightened awareness over sovereign credit risk will grow, and rightly so.
A report released last month by the Bank for International Settlements, entitled The Future of Public Debt: Prospects and Implications made some sobering conclusions. The report began earnestly:
"Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future."After a thorough analysis complete with detailed documentation, the BIS walked carefully through this political minefield:
"First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures. . .frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing. . .government revenues will be lower and expenditures higher, making consolidation even more difficult. . .Governments will not cut spending and bring their budget back into balance. They will simply lean on their central bank to print more.
Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk. . .
Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth. . .
Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. . .unstable debt dynamics could lead to higher inflation: direct debt monetization and the temptation to reduce the real value of government debt through higher inflation."
The sovereign debt crisis—which is actually a latent bank crisis because banks are stuffed with worthless paper of over-indebted sovereigns—is a powder keg, and the fuse has already been lit.
Own physical gold instead of someone's promise.