Factors affecting soverign default risks. Markets for the week ending 15-Jan-09

Given recent statements made by senior central bankers in Europe with regards to a further deterioration in the Greek bond markets, what are some of the factors that markets should be concerned about in terms of soverign default risks:

1) Debt servicing costs are set to soar as a proportion of GDP in Europe and US as the government debt issuance over the last 18 months to rescue the economy was one of the largest in recorded history
2) Structural deficits from a drop in tax revenue (from certain sectors) over the recessionary period experienced in the last 18 months may become a permanent feature that countries will have to come to face with
3) Weak and unstable economic outlook makes it difficult for governments to time and put in place their plans for fiscal tightening
4) Age related and social services spending are starting to rise and may alter the status quo and result in significant under-budgeting
5) High levels of capital mobility can complicate debt management and credit agencies are becoming very quick to issue concerns and downgrades

The only way out for governments is to come up with creditble details for financial stabilisation and plans for structural reforms to convince the investors that they will be able to address these demographic issues, such as raising pensionable age and look for new growth sectors to replace the sectors affected by the crisis. Strong political leadership is necessary to push through the changes necessary.

Eric Tan,
London