Senior bankers and economists warned yesterday that the risk of sovereign default among G7 members cannot be ruled out, as the financial crisis places unparalleled strain on rich country balance sheets.
Analysts added that the effective blanket guarantees of the financial system, and plans for massive government spending, had raised the spectre of sovereign ratings downgrades.
Philip Suttle, chief economist at Institute of International Finance, warned that the US government could “lose it its Triple A credit rating” as a result of having to finance bail-outs. He told Emerging Markets yesterday he did not see “how such a downgrade can be avoided.”
A US sovereign rating downgrade could fundamentally reshape the global investment landscape since global asset prices are benchmarked against US Treasuries.
Suttle’s comments came as the US National Debt Clock in New York this weekend ran out of digits, when the counter registered $10 trillion. Gross US debt this year reached about $9.6 trillion, or about 68% of GDP. The rescue legislation increased the government’s debt limit to more than $11.3 trillion from $10.6 trillion.
The additional borrowing faced by Treasury Secretary Henry Paulson could push the national debt well past 70% of GDP, the highest since the immediate aftermath of World War II, when the US was still paying off war debt.
John Chambers, chairman of the sovereign ratings committee at Standard & Poor’s, said: “When the dust settles, public finances would have changed markedly for the industrialized nations and that will have an impact on ratings in terms of rank ordering. It may also have an impact on absolute levels.”
Nouriel Roubini, the New York economics professor who forecast the current financial crisis two years ago, told Emerging Markets: “The largest sovereigns are not at risk yet, although several trillion of budget deficit in the US over the next few years might lead people to question whether the US is triple-A rated. But that is down the line.”
If the US has to issue $1 trillion of public debt next year, and the same the year after, on top of $500 billion that will need rolling over on maturity – i.e. a total of $3 billion – then “the question is whether the rest of the world is going to finance the US.
“I fear that the Chinese were willing to finance us when we were buying their goods, but now with exports to the US falling, they will do it rather to support our financial system. There is a fiscal time bomb in all [G7] economies.”
But bankers said the risk of inaction outweighed future fiscal consequences. Citigroup senior vice chairman Bill Rhodes argued that authorities should aim to “overshoot” rather than undershoot in organizing a financial bailout of their financial systems and institutions – and worry about “mopping up” later.
The policy response “has to overshoot,” agreed Bank of Mexico governor Guillermo Ortiz, speaking at an IIF seminar.
Goldman Sachs International managing director Robert Hormats told Emerging Markets he “did not believe” the US sovereign debt rating should or would be downgraded. The government should be prepared to go deeper into debt during emergencies such as the current one, Hormats added.
He said US government debt would in any case remain attractive to domestic and international investors, because of the enormous breadth and depth of the Treasury markets, a view that was echoed to Emerging Markets by former US Treasury undersecretary for international affairs Tim Adams.
Suttle said he accepted such arguments but that this did not weaken the case for objective ratings of US government debt.