Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20

Market Oracle FREE Newsletter


Sovereign Debt Defaults the Next Shoe to Drop?

Economics / Global Debt Crisis Dec 11, 2009 - 08:29 AM GMT

By: Mike_Larson


Best Financial Markets Analysis ArticleGovernments the world over have spent the past year bailing out, backstopping, insuring, and stimulating their financial sectors and economies. Trillions of dollars, euros, yen, and pounds have been thrown around like Halloween candy. Officials have assured us there’s little risk to that strategy.

But we have warned consistently that the opposite is true. Our stance: If you borrow and spend too much, all you’re going to do is transform a Wall Street debt crisis into a Washington debt crisis.

Lo and behold, the bill for all this global fiscal and monetary largesse is beginning to come due. Debt and deficit problems are going from bad to worse in many nations. That’s raising the very real risk of the unthinkable: Widespread SOVEREIGN debt defaults!

Dubai Debt Proves Too Hot to Handle

The first shot across the bow came during Thanksgiving week. That’s when the tiny emirate of Dubai dropped a bombshell on the markets. A government-backed holding company, Dubai World, warned that it needed to restructure its debts. The firm is buried under $26 billion of obligations tied to its property development arm Nakheel PJSC and other subsidiaries.

The United Arab Emirates tried to assuage market concerns by pledging some aid to regional financial institutions. Many investors were also initially reluctant to sell their regional holdings because they believed Dubai’s oil-rich neighbor Abu Dhabi would step in and bail Dubai out.

But that optimism is rapidly fading. The prices of bonds issued by Nakheel, as well as other Dubai-backed companies like DIFC Investments and Dubai Holdings Commercial, are dropping fast. I’m seeing quotes as low as 44.5 and 47 cents on the dollar for some of them. Moody’s added to the concerns by downgrading the debt of several Dubai firms.

iShares is the top dog in ETFs.
Billions have been spent on loading up Dubai with overvalued property.

Even more troubling: The cost of credit default swaps — a form of bond insurance — on Dubai’s own OFFICIAL government debt is exploding. It just surged to 545 basis points from a pre-crisis level of around 257 basis points. That means it now costs $545,000 a year to insure $10 million of Dubai debt against default, more than twice as much as a few months ago.

Am I surprised? Not in the least. I mean, look at what Dubai has done in the past few years. It built an indoor ski slope in the middle of the desert. It constructed palm-shaped islands in the Persian Gulf, loaded up with overvalued property. And it borrowed hundreds of millions of dollars to build the tallest tower in the world, the Burj Dubai.

In other words, the Dubai debt crisis was a long time coming. But the troubling thing is that Dubai is NOT alone …

Greece Heading down the Slippery Slope to Default?

Greece is part of the European Union, and it’s rapidly sliding down the slope toward default. Its budget deficit has exploded to 12.7 percent of GDP, the worst in the 27 EU countries, while its outstanding public debt load is on track to hit 125 percent of GDP next year.

In order to avoid stiff EU sanctions and penalties, Greece is slashing its operations budget by 10 percent. The government is also planning a 2010 hiring lockdown and a partial public salary freeze. Greece’s Finance Minister George Papaconstantinou says there is “absolutely” no default risk.

But those measures don’t appear to be comforting investors. The Athens Stock Exchange General Index has plunged more than 28 percent from its mid-October high. Meanwhile, Greece’s two-year government debt just dropped in price by the most in 11 years. Yields on those securities have more than doubled to 2.97 percent from 1.32 percent in less than a month!

Fitch has already cut Greece’s sovereign debt rating to “BBB+.” That’s the third-lowest investment grade rating. Standard & Poor’s rates Greece “A-,” but that rating may be lowered soon.

Bottom line: We’re facing the very real possibility of a significant sovereign debt default or bailout in Europe.

What about Spain? The U.K.? The U.S.?

At times like these, investors naturally ask themselves where the next domino might fall. My answer: How about Spain? S&P just lowered its credit outlook for that country to negative from stable. The ratings agency cited “pronounced deterioration” in the country’s public finances.

Spain is in trouble because it experienced its own gigantic housing bubble, one that has long-since popped. Unemployment is on track to top 20 percent in 2010, while the nation’s deficit is swelling toward 11 percent of GDP. The economy has shrunk for six straight quarters, prompting the government to spend billions of dollars to stimulate growth.

Then there’s the U.K. Its budget deficit is running at 12 percent of GDP, the highest in the Group of 20 community of nations. That’s forcing the government to impose a 50 percent tax on banker bonuses, and to boost income taxes. Despite those moves, the U.K. Treasury is still going to have to borrow billions more pounds than it originally planned to fund its deficit.

And what about us? The fiscal 2009 budget deficit here soared to $1.4 trillion, the worst ever. That was equal to 9.9 percent of the overall economy — almost triple the level of a few years ago and the highest in the nation’s history, excluding years where deficits were bloated by massive war spending (à la World War II). Over the next decade, the Congressional Budget Office projects an additional $7.2 trillion-plus in red ink.

We are now borrowing record amounts of money, week in and week out, to underwrite our profligacy. Example: In the week of Thanksgiving alone, the U.S. was forced to sell a whopping $118 BILLION in debt. That included $44 billion in two-year Treasury notes, $42 billion in five-year notes, and $32 billion in seven-year notes — all record amounts for any single auction.

Our debt load is rising so fast, Congress will soon need to raise the so-called debt “ceiling.” The current $12.1 trillion limit could reportedly jump by as much as $1.8 trillion.

Everyone knows the cap is a joke. Every time we come close to tagging it, lawmakers just raise it again. But the frequency and size of those increases is getting totally out of control.

Indeed, we may be seeing the first signs of a bond investor rebellion. Yesterday’s auction of $13 billion in 30-year bonds bombed big time. The Treasury could only sell the debt by offering much higher-than-expected yields, and even at those elevated yields, key measures of demand were weak.

Result: A key interest rate spread — the difference between yields on 2-year notes and 30-year bonds — blew out to 372 basis points. That’s the highest in 29 years of record keeping.

The loud and clear message from the bond market? We’ll buy very short-term Treasuries six ways ’til Sunday. But if you want to borrow long-term money at the same time you’re printing dollars like crazy and selling the most bonds in the history of the world, you’re going to have to pay up!

iShares is the top dog in ETFs.
The U.S. budget deficit soared to $1.4 trillion in 2009 and is projected to reach $7.2 trillion over the next decade.

Nobody expects the U.K. or U.S. to lose their AAA debt ratings anytime soon. But Moody’s just warned in a report that both countries’ ratings are at more risk than those in other triple-A rated countries like Germany and France. And I don’t see any credible plan coming out of Washington to get our disastrous budget situation under control.

Given this environment, my advice for investors is simple: Avoid investing in regions where sovereign credit risk is rising. Focus instead on countries where government debt and deficits are NOT a major threat. For instance, China, Brazil, and Australia are generally sitting on massive reserves, seeing healthy growth, and otherwise prospering even as Greece, Dubai, and Spain struggle.

You may also want to think about lightening up your risk a little bit. That’s what I’ve been doing in some of my services, as my paying subscribers know.

Until next time,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules