Global debt woes are severe enough that some governments will default on their bonds, says Arnaud Mares, an executive director at Morgan Stanley.
“Governments will impose a loss on some of their stakeholders,” Mares wrote in a report obtained by Bloomberg.
“The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”
Governments will be hampered by spending requirements for their aging populations and by their inability to raise taxes, Mares writes.
The weaker economies of Europe, including Greece, Portugal and Ireland, already have faced rising borrowing costs amid investor fears about their debt burdens.
Standard & Poor’s just downgraded Ireland’s credit rating, thanks to the escalating price tag of nationalizing its banks.
But it’s not just Europe. The sovereign-debt crisis is global “and it is not over,” Mares said.
Default is unlikely in advanced economies, he says. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”
In a recent report, Moody’s, while affirming the triple-A rating for the United States, United Kingdom, France and Germany, said their “distance to downgrade (is) much reduced.”
It might seem incongruous that Treasury bill yields are falling to historic lows while the U.S.’ credit standing declines, and that’s why some experts call the bond market a bubble.
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