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sovereign debt over the next three to
five years? What is the probability in
the next three to five years that any of
the major industrialized countries (the
United States, Japan, Germany, France,
and the United Kingdom) lose their top
ratings*? And how might the increased
prospect of default in the eurozone
periphery and the loss of triple-A ratings
in the major industrialized countries
affect the global economy?
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T intensification of the
eurozone debt crisis
for the global economic
Greece:
Ireland:
✔ Certain
✔ Certain
recovery should not be Portugal: ✔ Certain
underestimated. This crisis Spain: ✔ Probable
has the potential to deliver a
major blow to the European Major industrial countries
banking system, which is the main holder of the European
periphery’s US$2 trillion in sovereign debt obligations. losing their top rating?
Over the next twelve to eighteen months, there is every
United States: ✔ Probable
prospect that Greece and Ireland will choose to restructure
their sovereign debt. They will do so as their economies sink Japan: ✔ Certain
further into the deepest of recessions under the weight of the Germany: ✔ Won’t happen
draconian fiscal adjustment being imposed on these coun-
France: ✔ Probable
tries by the International Monetary Fund and the European
Union within the straightjacket of their euro membership. United Kingdom: ✔ Probable
A Greek or Irish sovereign debt restructuring would
constitute the largest such restructuring in history. It would
also more than likely result in an escalation in contagion to closure crisis continues unabated, and international oil
Portugal and Spain, since both of these countries have extra- prices are again at high levels.
ordinarily large external financing needs in 2011. A deepening in the European crisis must be expected to
A banking crisis in Europe, coupled with a renewed result in a further weakening in the euro, which would put
European economic downturn, will have serious implica- U.S. exporters at a competitive disadvantage, since it would
tions for the global economic recovery. In particular, it heighten existential questions about the euro. It must also be
would heighten the risks of a petering-out in the U.S. eco- expected to result in an increased degree of global risk aver-
nomic recovery, since it would come at precisely a time sion given the great degree of interconnectedness of the
when U.S. unemployment remains unusually high, the fore- world’s financial system.
T
Spain:
or at least my view of the
story. Too many words have
Major industrial countries already been written as to the whys
losing their top rating? and wherefores. Praise the Lord
and pass the ammunition.
United States: ✔ Won’t happen
Japan: ✔ Probable BARTON M. BIGGS
Germany: ✔ Won’t happen Managing Partner,
“haircuts”
Likelihood of default or
on the periphery?
Greece: ✔ Unlikely
Ireland: ✔ Unlikely
Portugal: ✔ Unlikely
Spain: ✔ Won’t happen The risk of government
Major industrial countries
defaults threatening the
losing their top rating? recovery is a somewhat
✔ Unlikely exaggerated fear.
United States:
Japan: Already AA-
Germany: ✔ Won’t happen
JIM O’NEILL
France: ✔ Probable Chairman, Asset
United Kingdom: ✔ Unlikely Management, Goldman
Sachs International
here is growing evidence of accelerat- revenues grow and spending becomes less
MICHAEL J. BOSKIN
Likelihood of default or “haircuts” Tully M. Friedman Professor of
on the periphery? Economics and Hoover Institution
Senior Fellow, Stanford University,
Greece: ✔ Probable and former Chair, President’s
Ireland: ✔ Fifty-fifty Council of Economic Advisors
Portugal: ✔ Fifty-fifty
ny increased prospect of some
Spain: ✔ Fifty-fifty
he answers are not independent. Spain, Greece, German GDP—every year forever. Germany’s
“haircuts”
Likelihood of default or
on the periphery?
Greece: ✔ Certain
Ireland: ✔ Unlikely
Portugal: ✔ Unlikely
Spain: ✔ Unlikely
RONALD MCKINNON s long as the United States, Japan, and the United
Professor Emeritus of
International Economics,
Stanford University
A Kingdom own their own central banks, they won’t
default on their respective Treasury bonds out-
standing—which are denominated in dollars, yen, and
pounds respectively. Each central bank can buy back its
own Treasury bonds by just “printing” money. Hence
there is long-run inflation risk but not default risk.
Likelihood of default or “haircuts” For Germany and France, the situation is more com-
on the periphery? plex because their
national central banks Defaults could restart
Greece: ✔ Probable cannot directly print a banking crisis.
euros. But Germany is a
Ireland: ✔ Probable
major international creditor and France is probably, on
Portugal: ✔ Probably net balance, a creditor also. So I would not expect either
Spain: ✔ Unlikely to default on Treasury bonds outstanding.
The big threat to European recovery is that defaults
on its periphery could restart a banking crisis. German
Major industrial countries banks in particular have lent heavily to governments and
losing their top rating? firms in southern and Eastern Europe.
The United States has a similar problem should
United States: ✔ Won’t happen there be substantial defaults by its state and local govern-
Japan: ✔ Won’t happen ments—particularly on their unsustainable defined-
Germany: ✔ Won’t happen benefit pension plans. But municipal bonds are owned
mainly by wealthy individuals, and pensioners might be
France: ✔ Won’t happen out of pocket. So defaults are much less likely to directly
United Kingdom: ✔ Won’t happen impact U.S. banks.
G be downgraded,
considering
heavy burden of its debt
the United States:
Japan:
✔ Won’t happen
Already AA-
and poor prospects for economic growth. At the
moment, Greek debt is protected by the European
Germany: ✔ Won’t happen
Financial Stability Facility with a deadline of France: ✔ Unlikely
2013. After this, the fund will be replaced by a per- United Kingdom: ✔ Unlikely
manent new organization. But efforts by creditors
to make settlements cannot be ruled out. Ireland
and Portugal have better growth prospects. The
existence and apparently the brilliant start of the nomic reversal in this country is, obviously,
EFSF lend it high credibility. Ireland and Portugal unlikely for the next three and even five years.
have two years during which they can benefit from France’s sovereign debt is average for an
this credibility and prove that they can manage industrialized country and even lower if one takes
sound economic and fiscal policy. into account the retail pension burden (France’s
Spain is unfairly put in the disagreeable PIGS demographic situation is better than that of other
category. Spanish sovereign debt is less important countries). But its policy for reducing deficits is
than most other advanced economies’ debts. Of much too timid and political consensus on public
course, private debt is high and the current account finances, globalization, and markets is not evident.
largely umbalanced, but Spain’s economy can ben- The United Kingdom has been suffering from
efit from an improvement in the real estate market. spectacular deterioration of its economic and fiscal
Its international banks are solid and well-managed situation which could justify questions about its
and the government has begun a severe program rating. But the government has engaged in a very
for reducing deficits. severe and credible plan for reducing deficits. In
The United addition, playing host to the largest financial and
The United States States has a very bad money markets in the world is strategic protection.
fiscal situation and An increased prospect of default in the euro-
has a very bad the government has zone periphery would not have a significant
fiscal situation. failed to take mea- impact on recovery, considering the weak share
sures to improve it. of Greece, Portugal, and Ireland in the global
But rating agencies will never take the risk of GDP, and if the successor in 2013 to the EFSF is
downgrading the country which issues the major credible.
international reserve currency—and with which The loss of triple-A ratings for major industri-
they do so large a part of their business. alized countries could encourage new fiscal cut-
Japan was just downgraded to AA-minus. Is backs and, theoretically, have some impact on
further downgrading possible? This country has by economic growth, especially if the United States is
far the heaviest sovereign debt among big industri- concerned, but in my opinion this country will not
alized economies. Even if domestic saving is be downgraded. If other counties lose their rating,
important, Japan’s economic growth is hesitant the exact reasons are important, otherwise rating
and its policy situation sometimes blurred. agency credibility could be questioned.
For Germany, everything is possible, including Nevertheless, it is uncertain such an issue could
the worst (that is the secret motto of central have significant impact on fiscal policies if eco-
bankers!). But a spectacular policy and/or eco- nomic growth remains weak.
C conversation on weak-
nesses in sovereign debt
is bound to have a depressing effect on the finances of
losing their top rating?
United States: ✔ Won’t happen
marginal economies in southern Europe, if not else- Japan: ✔ Unlikely
where. This negative impact may be offset in part by
the continued economic strength of Germany and also
Germany: ✔ Unlikely
the United States. France: ✔ Unlikely
Practical reasons will inhibit the rating agencies United Kingdom: ✔ Unlikely
from seriously contemplating downgrading the
Treasury issues of the United States These agencies
may have escaped tough government oversight for
the time being. However, substantial discussions of
downgrading Treasuries could lead congressional United States will not lose its triple-A rating for sov-
committees and perhaps some regulators to initiate ereign debt and such an eventuality is unlikely for
investigations and public hearings. Any sensible Germany, France, the United Kingdom, and Japan.
management would try to avoid opening itself to The peripheral countries will not all enjoy such
such potential problems. luxury. Haircuts are initially certain for Greece and
Thus, for the major industrialized nations, mud- Portugal and, to a lesser degree, probably for Ireland
dling through is the most likely outcome. The and Spain.