It seems that sovereign risk - this is one of the most serious post-crisis problems, especially in the developed world. It requires special attention in light of the debt crisis in Greece. Before the authorities created a dilemma: how to take into account the demand of investors on financial consolidation, without violating the weak recovery is too strict fiscal policy. Deteriorating situation with the budget since the beginning of the financial and economic crisis led to an increase in the number of at risk of default. Budget deficits have risen sharply in many countries due to the fact that the economic slowdown has reduced tax revenues, and rescue the financial sector, fiscal incentives and payment of social security benefits have increased government spending. In some countries, such as Greece, the authorities are forced to quickly reduce the deficits by resorting to austerity. And in the other deficit still remains high. For example, in U.S. analytical department of the British magazine "The Economist" expects that this year's government deficit will increase to 10.5% of GDP and would reduce it, but slowly. We believe that the 2014 deficit still would be 6.4% of GDP, far higher than before the crisis.
The financial future of other developed countries does not look better. United Kingdom, where this year's expected deficit of 14% of GDP, after the election program of introducing austerity, but we believe that by 2014 the deficit will still be equal to 8% of GDP. In 2010, interest payments on public debt will rise to pre-crisis level of 2% of GDP to 6.5% of GDP. In Spain, the interest payments will rise from 1.9% of GDP this year to 4% in 2014 partly on the increased costs of debt service associated with the normalization of interest rates, which are restored from the current lows, and partly as a result of growth in public debt. By 2014, Spain's public debt will rise to 71% of GDP mark of 36% in 2007, in France, 64% become 95%. A growing share of the costs of servicing the debt to GDP hinders economic growth. The authorities of the countries had to divert more of their budgets on payment of creditors, rather than investing in the development of productivity. This raises particular concerns in the current environment, given that most countries are now far fewer opportunities for growth than before the crisis. In addition, the problems of the past 18 months, for example, in the financial sector could significantly undermine the growth potential of countries. If concerns about the sovereign risk will increase, the cost of credit will grow even more, holding back economic growth and tax revenues (which may make it harder for governments to improve their financial situation).
The above experience does not depend on whether the easing of fiscal policy is pushing the country into default. But if there is a default 'or preddefoltnaya situation, it will exacerbate the already precarious situation of the world economy. First, that the most dangerous for the country's weakened, it can cause a rapid outflow of capital. In many States, the yield on government bonds rose, when lenders demanded higher premiums. Also it will increase the cost of the private sector to finance debt. Sovereign crisis is contagious. As the continuing tensions in the euro area (despite the fact that Greece avoid default), the national debt of their own country may give rise to investors' doubts about the safety of debt issued by other countries. In this connection it may be a new wave of unrest in the financial market, especially if the decline in credit ratings will (and perhaps force) institutional investors adjust their portfolios of government bonds. In view of the foregoing, the epidemic will increase capital inflows and reduce the yield on bonds in safe countries. This could include the U.S., despite their continuing financial difficulties. America occupies a special position due to the liquidity of its government securities market and the exceptional status of the U.S. dollar as the international reserve currency.
The risk increases
Our sovereign rating confirms that many countries will soon face financial difficulties. Since mid-2007 we have lowered the credit rating of most OECD countries, including Denmark, Finland, Germany, Sweden, Switzerland and the United States with AAA (highest rating) to AA. However, this rating is also very high. For comparison, among other countries, Spain, Portugal, Ireland and Japan have sunk to the BBB. Rating Greece on the order below - BB. These ratings indicate a higher probability of default, while for countries with high credit ratings it is now highly unlikely. Danger that the reaction of the market and policies on sovereign risk can undermine economic growth at a time when recovery is not guaranteed. The more the authorities will tighten their belts under the influence of market and political pressures, the higher the probability that the economy could be plunged into recession. But the weak balance sheets mean that the private sector is not in the form to be the engine of growth. Consequently, governments are faced with adversity dilemma: to quickly reduce the deficits by saving, sacrificing short-term recovery, or do it slowly and prepare for possible impacts on the stock market. Fast convolution of fiscal incentives could exacerbate the problem that has confronted the world and rich countries in particular - as a complete action on the emergency support. Continue their endless too expensive, but over time the base effect in any case limit the stimulatory effect of the remaining measures (some of which, such as public works projects are yielding results not immediately). For this reason, we expect a slowdown of GDP in OECD countries with 2% (at purchasing power parity) in 2010 to 1.6% in 2011. It is clear that further deterioration of the financial situation may cast doubt on that prediction. That would be bad news not only for the countries for which it has direct significance, but for many states that are indirectly dependent on the stimulating action of the rich world through trade.
The financial future of other developed countries does not look better. United Kingdom, where this year's expected deficit of 14% of GDP, after the election program of introducing austerity, but we believe that by 2014 the deficit will still be equal to 8% of GDP. In 2010, interest payments on public debt will rise to pre-crisis level of 2% of GDP to 6.5% of GDP. In Spain, the interest payments will rise from 1.9% of GDP this year to 4% in 2014 partly on the increased costs of debt service associated with the normalization of interest rates, which are restored from the current lows, and partly as a result of growth in public debt. By 2014, Spain's public debt will rise to 71% of GDP mark of 36% in 2007, in France, 64% become 95%. A growing share of the costs of servicing the debt to GDP hinders economic growth. The authorities of the countries had to divert more of their budgets on payment of creditors, rather than investing in the development of productivity. This raises particular concerns in the current environment, given that most countries are now far fewer opportunities for growth than before the crisis. In addition, the problems of the past 18 months, for example, in the financial sector could significantly undermine the growth potential of countries. If concerns about the sovereign risk will increase, the cost of credit will grow even more, holding back economic growth and tax revenues (which may make it harder for governments to improve their financial situation).
The above experience does not depend on whether the easing of fiscal policy is pushing the country into default. But if there is a default 'or preddefoltnaya situation, it will exacerbate the already precarious situation of the world economy. First, that the most dangerous for the country's weakened, it can cause a rapid outflow of capital. In many States, the yield on government bonds rose, when lenders demanded higher premiums. Also it will increase the cost of the private sector to finance debt. Sovereign crisis is contagious. As the continuing tensions in the euro area (despite the fact that Greece avoid default), the national debt of their own country may give rise to investors' doubts about the safety of debt issued by other countries. In this connection it may be a new wave of unrest in the financial market, especially if the decline in credit ratings will (and perhaps force) institutional investors adjust their portfolios of government bonds. In view of the foregoing, the epidemic will increase capital inflows and reduce the yield on bonds in safe countries. This could include the U.S., despite their continuing financial difficulties. America occupies a special position due to the liquidity of its government securities market and the exceptional status of the U.S. dollar as the international reserve currency.
The risk increases
Our sovereign rating confirms that many countries will soon face financial difficulties. Since mid-2007 we have lowered the credit rating of most OECD countries, including Denmark, Finland, Germany, Sweden, Switzerland and the United States with AAA (highest rating) to AA. However, this rating is also very high. For comparison, among other countries, Spain, Portugal, Ireland and Japan have sunk to the BBB. Rating Greece on the order below - BB. These ratings indicate a higher probability of default, while for countries with high credit ratings it is now highly unlikely. Danger that the reaction of the market and policies on sovereign risk can undermine economic growth at a time when recovery is not guaranteed. The more the authorities will tighten their belts under the influence of market and political pressures, the higher the probability that the economy could be plunged into recession. But the weak balance sheets mean that the private sector is not in the form to be the engine of growth. Consequently, governments are faced with adversity dilemma: to quickly reduce the deficits by saving, sacrificing short-term recovery, or do it slowly and prepare for possible impacts on the stock market. Fast convolution of fiscal incentives could exacerbate the problem that has confronted the world and rich countries in particular - as a complete action on the emergency support. Continue their endless too expensive, but over time the base effect in any case limit the stimulatory effect of the remaining measures (some of which, such as public works projects are yielding results not immediately). For this reason, we expect a slowdown of GDP in OECD countries with 2% (at purchasing power parity) in 2010 to 1.6% in 2011. It is clear that further deterioration of the financial situation may cast doubt on that prediction. That would be bad news not only for the countries for which it has direct significance, but for many states that are indirectly dependent on the stimulating action of the rich world through trade.
The Economist
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