Morgan Stanley: Government Defaults Inevitable

Government bonds have been some of the safest investments available in the world, but that is all about to change.

Arnaud Mares, an executive director at Morgan Stanley in London has completed research that shows governments around the world “will impose a loss on some of their stakeholders.  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.”

Mares’ research all wraps around deficit spending and debt ratios to revenue. Bloomberg reports:

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks. The yield on Greek debt rose to more than 900 basis points above that of Germany today, the most since the European Union and International Monetary Fund created a 750 billion euro ($948 billion) bailout package in May.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt as a percentage of GDP is 53 percent, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest levels, the report said.