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The issue of sovereign risk

Sovereign risk is becoming one of the most important post-credit crisis policy issues, according to the Economist Intelligence Unit (EIU).

“It (sovereign risk) is creating a dilemma for governments needing to address investor demands for fiscal consolidation without stifling a fragile recovery,” the EIU said.

“While sovereign default is still a remote possibility for highly rated countries, the bigger threat is that the market response to perceptions of sovereign risk may dampen economic growth.”

EIU analysts warn that the fiscal prospects for developed countries remain grim. The United States is expected to run a deficit of 10.5 percent of GDP in 2010, and a deficit of 6.4 percent of GDP in 2014.

The UK is expected to face severe post-election austerity measures, with the country’s deficit tipped to reach 14 percent of GDP this year and a deficit of 8 percent of GDP in 2014.

Spain's public debt could hit 71 percent of GDP by 2014, from an estimated 36 percent in 2007, according to the EIU, with public debt in France ballooning from 64 percent to 95 percent.

“Governments will have to spend more of their budgets paying creditors rather than investing in future productivity improvements,” the EIU analysts cautioned.

“This is a particular concern in the current climate, given that most economies' growth prospects are considerably weaker than before the crisis.”

2 March 2010

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