Fiscal Follies


David Rosenberg takes on the sovereign debt issue in his latest commentary, highlighting the structural deficits in the U.S. and the U.K. They are actually higher than in Spain or Greece.

Greece here, Portugal there. Did you know that the structural deficit-to-GDP ratio is actually higher in the U.S. (7.8%) and the U.K. (7.6%) than it is in Greece (6.1%) and Spain (5.8%)? Of course, what makes the U.S. different is that it has a revenue-to-GDP ratio of only 30%, which is at the very low end of the OECD rates which hover close to 40% or above. So America certainly has much more taxing capacity than anyone else does (and undoubtedly will have to use it because cutting back on health care is going to be a tough task ahead looking at the future demographic trends). It is with this taxing power in mind perhaps that Congress is now busy preparing for another $100+ billion budget bill (Jim Bunning finally relented) that will revive popular tax goodies and extend jobless benefits through to year-end (when undoubtedly they will get extended again).

The real difference between the U.S. or the U.K. and Spain or Greece is the currency issue. Greece and Spain are constrained by the Euro in a way that the state of California or the cities of Manchester or Glasgow are constrained. That is not the case for the sovereign governments in the U.K. or the U.S. Even Rogoff and Reinhart know this. Bill Mitchell wrote just yesterday about their much-discussed book:

Most of the commentators do not spell out the definitions of a sovereign default used in the book. In this way they deliberately or through ignorance (or both) blur the terminology and start claiming or leaving the reader to assume that the analysis applies to all governments everywhere.

It does not. Reinhart and Rogoff say:

We begin by discussing sovereign default on external debt (i.e., a government default on its own external debt or private sector debts that were publicly guaranteed.)

How clear is that? They are talking about problems that national governments face when they borrow in a foreign currency. So when so-called experts claim that their analysis applies to the “entire developed world” you realise immediately that they are in deception mode or just don’t get it.

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There is a world of difference between the U.K. and Greece. This bears remembering. That doesn’t mean the debt problems in the U.K. aren’t real. It just doesn’t have anything to do with national default. See my post On the sovereign debt crisis and the debt servicing cost mentality.

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Back to Rosenberg, he goes on to show you which countries have the best fiscal situation – and given recent commentary from Bill Gross, you could expect these sovereign bonds to outperform on a relative basis.

Canada seems pristine with just a 2.5% structural budget deficit and a debt ratio that is also below the U.S. However, when you tack on Ontario’s dilapidated fiscal situation, we still look okay comparatively speaking but it’s still somewhat of a dire budgetary landscape.

If you are looking for countries with low primary deficits and low government debt ratios then what fits that bill are Australia, New Zealand, Switzerland, Korea, Norway, the Netherlands and Sweden.

For a peek at who the next fiscal problem child will be, have a look at the article on page B1 of the NYT — Traders Turn Attention to the Next Greece. It would seem that the answer is Spain, Portugal and Ireland. We also suggest that you read The Califonization of America by David Wessel on page A2 of the WSJ.

I guarantee you the sovereign debt crisis is not over.  Greece’s problems appear to be abating for now, but this issue will re-surface.

Also see Bill Gross and the deficit ring of fire for another look at sovereigns that will outperform.


Breakfast with Dave, 4 Mar 2010 – David Rosenberg, Gluskin Sheff

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