Global Pessimism re Sovereign Debt: Morgan Stanley

Sept. 17, 2010 - PRLog -- In a new report, Morgan Stanley analyst Arnaud Marès argues that the sovereign debt crisis is not confined to Europe.

“It is a global crisis," he writes, "and it is far from over.”

The report argues that standard debt/GDP ratios are misleading

because they only capture part of the government’s liabilities,

and omit other government obligations such as unfunded pension liabilities.

In addition, Morgan Stanley argues that it’s more important to measure whether governments can meet their debt servicing obligations.

And that means comparing the government’s debt to its revenues.

Using this approach, US debt comes in at 358 per cent of government revenues, well above UK (169 per cent), Spain (153 per cent), Ireland (248 per cent) and even Greece (312 per cent).

Morgan Stanley also argues that measuring debt to GDP is essentially a backward measure of accumulated past government deficits.

It fails to measure the fiscal challenge that governments face as they struggle with large structural deficits

at a time when their populations are rapidly ageing and they’ll have to spend more on health and pensions .

“What raises questions about debt sustainability is not so much current debt levels

as the additional debt that will accumulate in coming years if policies do not radically change," the note says.

Morgan Stanley says Black September 2008 aggravated fiscal woes everywhere

“mostly through a permanent shock to tax revenues and

through a transfer of liabilities and risk from the private to the public sector,

without a commensurate transfer of resources.”

As a result, it “has intensified the inherent conflict that exists between bond holders and other government stakeholders

that all compete for resources that are finite and, crucially, insufficient to satisfy all their claims”.

Because governments don’t have the resources to meet all their various claims,

Morgan Stanley argues they “will impose a loss on some of their stakeholders and have in fact started to do so (across Europe at least).

The question is not whether they will renege on their promises,

but rather upon which of their promises they will renege, and what form this default will take" ...

To read more at http://www.economywatch.com’, go to:

http://www.economywatch.com/in-the-news/sovereign-debt-pe...

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