Are you ready for the GLOBAL DEBT BOMB?

Let鈥檚 play a little game called Disaster. Imagine an event that could trigger a genuine, knock 鈥檈m down, worldwide catastrophe. Think of Pearl Harbor, multiplied by 10, or even 100.





We鈥檒l limit the options to man-made events, but eliminate traditional candidates like nuclear war or co-ordinated terrorist attacks. Climate change scientists might put their money on a massive greenhouse gas-induced drought that triggers uncontrollable emigration鈥攅ntire countries emptying out, their citizens swelling the populations of Europe and North America. Doomsday economists, on the other hand, could raise the spectre of a global debt bomb: When industrial and emerging economies all exceed debt thresholds, a sovereign default by one country spreads like a firestorm, and triggers a global depression.





There鈥檚 no telling when, or if, the climate-change scenario could take place. Unfortunately, that鈥檚 not true of the second one. Debt bomblets have already exploded. And the big one鈥攖he Daisy Cutter鈥攊s being primed for action.





Greece is ground zero. Look at the damage the country inflicted on European debt, equity and currency markets this spring. How could a nation that accounts for less than 3% of the European Union鈥檚 gross domestic product (GDP) be so destructive?





There are two possible explanations. The first is that Greece鈥檚 fiscal problems belied its size. When Argentina, a country much wealthier than Greece, defaulted on its debt in 2001, the country鈥檚 annual budget deficit was the equivalent of 3% of its annual GDP. Its total accumulated public debt was 50% and its yearly international current-account deficit was 2%. And Greece? Its budget deficit last year was a whopping 13.6% of GDP, its public debt was 115% and its current-account deficit was 10%.





The second is that Greece is not a special case. Some of the world鈥檚 largest developed countries have budget deficits almost as large, relative to the size of their economies. The United Kingdom鈥檚 deficit weighs in at 11.4% of GDP, Spain at 11.2% and the United States at 9.9%. As deficits climb, so do national debts. Federal debt in the United States has climbed by half since 2006, to $12.3 trillion (U.S.) at the end of last year, swelling the debt-to-GDP ratio to 84%. Japan and Italy have debt ratios well beyond 100%. Almost every other country in the 30-nation Organization for Economic Co-operation and Development is watching its debt ratio climb relentlessly toward triple digits. Enormous debt loads used to be a problem for emerging economies. Today those burdens are also a problem for the allegedly wealthy countries.





More columns from this month's ROB magazine


鈥oes Japan's decline fortell our future


鈥ashington struggles to corral U.S. banks


鈥 manager who鈥檚 tamed bulls and bears


鈥 high-yield alternative to income trusts








National debt loads in the West will continue to climb as economies struggle to recover. The debts are only affordable now because central bankers have kept interest rates near zero. Watch what happens when interest rates rise. Economic growth isn鈥檛 rapid enough to stabilize debt-to-GDP ratios. Tax revenues have yet to recover, and no politician dares to take an axe to stimulus spending if it means plunging the economy back into recession. With governments, businesses and consumers still carrying such heavy debt loads, another major banking disaster could trigger another round of costly bailouts or nationalizations. Oh yes, aging populations will also inevitably create a pension crisis.





Economists Kenneth Rogoff and Carmen Reinhart, authors of the 2009 book This Time Is Different: Eight Centuries Of Financial Folly, calculated that, on average, countries add 86% to their debt loads within three years of a credit crisis. Governments of mature economies will issue an estimated $4.5 trillion (U.S.) worth of bonds this year.





The upshot is that some major countries face debt restructurings, debt defaults or both. High debt-to-GDP ratios alone can kill growth, as governments soak up private savings to pay interest charges and borrow more. Since 1980, Mexico, Russia and Argentina have all defaulted on their debt. The same thing could happen in bigger Western countries鈥攖he Daisy Cutter event.





Sovereign defaults can wreck economies. Banks can go bust as the prices of government bonds they hold plunge to cents on the dollar of face value. They can鈥檛 lend any more, which paralyzes businesses big and small. Currency devaluations destroy consumers鈥?buying power. Yes, eventually a mess can sort itself out, but that could take years, even decades. The Mexican peso crisis of 1994 walloped the rest of Latin America, and as late as 2002, some Brazilian bonds traded as low as 40 cents on the dollar.





Here鈥檚 a guess: Governments will take the cowardly option and try to inflate their debts away. They won鈥檛 stop spending, and the currency printing presses will run flat out. But that strategy often backfires, and t|||Wow did you write that yourself or copy and paste it? You sound really intelligent, and I think you know what your talking about. as for your guess "the governments will take the cowardly option and try to inflate their debts away". i hate to burst your "debt bomb" so to speak, but theyve been doing that for YEARS.|||Only someone completely clueless would post this TODAY, when the market was up 300 points because China said it has confidence in Europe and won't be selling it's debt.|||Absolutely, that's why gold is at all time high|||The problem is different now - we have a global economy now so any restructuring of currency or debt would be done a a global scale - which is actually the scary part.





I could see the US restructuring some of its debt, but reshaping the entire global economy is scary especially for the US since we are on top - we will suffer the most when brought down to the levels of other countries.|||Yep, and the worst economies are also the grossest overpopulating ones, which reduces their ability to recover, strains their resources and causes their excess to flood into the Euro-cultures who have stopped overpopulating. That drags down those weakened (from what you describe) economies into depression tipped by undercut salaries and taking jobs thus defaulting personal debt.