By: Dr. Mike Campbell
The next nation in the Eurozone sovereign debt cross-hairs is Italy. Doubts are being expressed that Italy will be able to service its debts and so the yield on Italian bonds is rising, making a default more likely. Stop me if you’ve heard this one before. It is, of course, the same overture that marked the opening strains of the Greek debt crisis, then the Irish debt crisis and, most recently, the Portuguese debt crisis. Analysts have referred to this relay of financial pain as “contagion”, but the only thing being passed on is greed.
Sovereign debt is a fact of modern life in all of the democratic, developed economies and even communist China is not exempt from it, at least at the regional level. Simply put, governments have bought into the “have it now” philosophy of rampant consumerism. Just like a twenty something that wants the latest clothes, hi fi, holidays in the sun and all the electronic gizmos that the industry can think up, world governments have been “putting it on their plastic” for a very long time. Whereas the wayward consumer has to face a day of reckoning because he is personally liable for the debt, governments come and go and no one individual has to be held accountable. Unlike the consumer who will eventually be refused credit when it becomes clear that he is in well over his head, governments are always good for a new hit of credit and their bonds are always well subscribed.
The world’s most indebted nations are Japan and the USA, but their cost of borrowing has remained low. Italy has seen its borrowing costs rise to 5.6% on its ten-year bonds from 4.85% just a couple of weeks ago. The jitters send the Euro lower against other major currencies, but it will recover when fresh moves are announced to prop-up Greece, or if a further IMF/EU bailout is agreed for Italy. The pattern is clear to see from previous chapters in the sovereign debt story and it is unlikely that the story is finished yet.