Roubini on the Massive Debts of the Wealthiest Nations

Government debt continues to be one of the most written about topics of 2010… and for good reason. The most developed and wealthy economies can’t seem to refrain from spawning the extraordinary levels of debt that were historically seen only in emerging markets (which for the most part, seem to have improved their balance sheets).

Today Nouriel Roubini points a finger at some of the worst offenders:

“Indeed, rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors.

“The impact was greater in countries that had a history of structural fiscal problems, maintained loose fiscal policies, and ignored fiscal reforms during the boom years. In the future, a weak economic recovery and an aging population are likely to increase the debt burden of many advanced economies, including the United States, the UK, Japan, and several euro-zone countries.”

Roubini notes that monetizing debt has an irresistible allure to countries in already weak fiscal positions and to the PIGS (Portugal, Italy, Greece, and Spain) that have already shown lacking competitiveness in the global economy.

Last but not least, he sees the US and Japan in the crosshairs of bond vigilantes. For the US in particular, which has so many structural challenges, Roubini believes “Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates”. True indeed.

Read more about the events Roubini sees unfolding as these nations move to “prevent an Argentine-style outcome” in Project Syndicate’s coverage of the risky rich.