Rogoff Foresees A Wave of Sovereign Debt Defaults

Kenneth Rogoff, former IMF chief economist warned that a series of sovereign debt defaults is likely to be in the offing. From Bloomberg:

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years. I predict we will again,” Rogoff,…said at a forum in Tokyo today.

He said financial markets will eventually drive interest rates higher, and European countries such as Greece and Portugal will “have a lot of troubles….

“It’s very, very hard to call the timing, but it will happen,” Rogoff, 56, said in the speech. “In rich countries – – Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates. They will deal with it.”…

Rogoff said Japanese fiscal policy is “out of control.” Japan has the world’s largest public debt, with gross liabilities that are approaching twice the size of the economy.

Rogoff is far from alone in seeing sovereign defaults as likely, but so far, the chorus of concern comes mainly from analysts and investors rather than well-known economists (Willem Buiter was notable exception in that regard). One correspondent said that one of his sources, with impeccable contacts, anticipates 12 sovereign debt defaults in the EU. And while Rogoff puts Greece and Portugal as top of his hit list, a recent Bridgewater report (no online source) took a hard look at Spain, and did not like what it saw:

On net, Spain owes the world about 80% of GDP more than it has external assets. As a frame of reference, the degree of net external debt Spain has piled up in a currency it cannot print has few historical precedents among significant countries and is akin to the level of reparations imposed on Germany after World War I. We don’t know of precedents for these types of external imbalances being paid back in real terms.

In the Great Depression, the debtor countries, who both defaulted and devalued their currencies by leaving the gold standard fairly early, did better than creditor countries (as in they suffered smaller drops in GDP and recovered faster). But it is not clear how this will play out in the EU, where the debtors cannot depreciate their currencies (and as we also noted, the recent example of Sweden v. Norway also suggests that currency devaluations are not always the tonic they are assumed to be).

Another complicating factor is that European bank will need to refinance over €1 trillion of debt in the next two years. This not only will pressure spreads on sovereign credits, but conversely, will lead to higher bank borrowing costs. Since banks in the eurozone on the whole are even more thinly capitalized than those in the US (they are even less are along in writing down dud assets), this will at a minimum dampen lending and has the potential to put pressure on particularly weak institutions. From Ambrose Evans-Pritchard at the Telegraph (hat tip reader Swedish Lex):

Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.

“The scale of such issuance could raise a significant ‘crowding out’ issue, whereby government bonds suck up the vast majority of capital,” said Graham Secker, Morgan Stanley’s equity strategist. “The debt burden that prompted the financial crisis has not fallen; rather, we are witnessing a dramatic transfer of private-sector debt on to the public sector. The most important macro-theme for the next few years will be how easily countries can service and pay down these deficits. Greece may well prove to be a taste of things to come.”

This is going to be an interesting next couple of years, and the odds are pretty high that it may not be interesting in a good way.

Print Friendly, PDF & Email


  1. Susie Dow

    This is going to be an interesting next couple of years, and the odds are pretty high that it may not be interesting in a good way. – YS

    Is there any chance you could rough out some sample scenarios of how this might actually play out? Not so much from an investment point of view but rather, how can you make the best of it under the circumstances.

  2. psychohistorian

    Since there are no prosecutions for the perps that got us here anywhere in the world, I guess they get away with out going to jail.

    If the world economies get as bad as it looks, jail may be a safer place for some of these folks.

    Time will tell.

  3. Diego Méndez

    “On net, Spain owes the world about 80% of GDP more than it has external assets. As a frame of reference, the degree of net external debt Spain has piled up in a currency it cannot print has few historical precedents among significant countries and is akin to the level of reparations imposed on Germany after World War I.”

    Anglo-Saxons haven’t gotten over the euro’s birth. You can deal with Spain’s euro debt as with Third-World countries’ external debt in the 80s, or Germany’s reparations, for lots of reasons, including:

    – Spain can tax in euros while Brazil, Mexico, etc. couldn’t
    – If in need, euro countries help each other via regional and infrastructure funds and ad hoc help
    – Most of Spain’s trade is with euro countries and in euros
    – Spain’s external debt financed mainly productive investment, not consumption, and even less war reparations!

    These conditions have “few historical precedents”, too.

    Yves, do you really need to post this BS each and every day?

    1. Sid

      What flavor of Euro-Kool Aid are they serving?

      If the Euro is poised for bigger and better things, don’t complain that Yves is talking it down or speculators are attacking your beloved single currency.

      Don’t blame speculators – get to work buying Spanish/Greek/Portuguese government debt while its cheap, then sell for a sure profit when things are back to the way they should be.

      If things are the way you say, this is free money, there for the taking.

      n.b. aside from commenting on how communists want to prevent us from borrowing our way to prosperity, a stronger Euro would be in my personal interests. But that doesn’t make me fall in love with a currency.

      1. Diego Méndez


        putting a false information on Financial Times’ first page in order to manipulate the market into selling Greek bonds, as speculators did some weeks ago, is not only unethical but also illegal.

        You must understand there are many, many people whose salary depends on misinforming and manipulating the market. Much like with global warming, a responsible blogger should not let them pollute real news.

        On the other hand, my complaint today was about a stupid comparison: Spain’s external debt (in its own currency!) compared to ordinary historical external debts (in ballooning foreign currencies!). There’s no Kool-Aid in criticizing a stupid, non-innocent comparison.

        1. jake chase


          When was the last time you saw anything but misinformation in the FT or the WSJ? Misinformation is the currency of finance.

          My question is how long will Germany stick with the EU? Will it gain more from continental exports than it loses from internal inflation? Better hope the Chinese develop an appetite for those Euro bonds; otherwise the world may have a hard currency sooner than you think.

    2. Dan Duncan

      Diego, since there’s a post on the EU, I wanted to help you out in your efforts today.

      This one’s from I’ve taken the liberty, as an artist, to insert “EU” in place of “TIGERS”. Here we go….


      LET ME HEAR YOU CLAP YOUR HANDS! [clap hands 5 times].
      LET ME HEAR YOU STOMP YOUR FEET [stomp feet 5 times].

      GO EU, GO!
      Gooooooooo EU!

    3. Mind the GAAP


      Please tell me which institutions will fund which countries, with rough numbers attached.

      When I ran my numbers about a year ago, I came to the conclusion that it is absolutely impossible to get out of this–basically, there are too many debtors and not enough willing creditors (to Europe)–but I’m willing to be convinced otherwise.

    4. anonymous

      “If in need, euro countries help each other via regional and infrastructure funds and ad hoc help”

      Greece is still waiting for that help…

    5. Marshall Auerback

      This is not a “Spain” problem or a “Greece” problem. Yes, Spain can tax in euros, just as California can “tax” in dollars, but it (like every other EMU nation) LACKS THE CAPACITY TO CREATE CURRENCY. That’s the key problem. It’s a straitjacket (until the restraints are taken off, which they won’t be until Germany realises it is in the same roach motel).
      How does the “vertical” money component in MMT needed to pay taxes and purchases Spain/Greece/Portugal, etc government debt net flow into their respective domestic private sectors?

      No EMU country has a sovereign currency, so none cannot spend central bank created reserves into existence to collect as tax revenue or bond proceeds.

      Then vertical money stock increases two ways.

      1. Greece or Spain has a fixed nominal exchange rate with the rest of the eurozone. If either runs a trade surplus with the eurozone, euros flow in its domestic private sector (DPS) that can be used to pay taxes or buy government bonds. Note, however, that the euros earned in trade with eurozone must have been created somehow at an earlier time.

      2. ECB can net purchase financial assets held by nation states’ domestic private sector and credit them with euro reserves that can be used to pay taxes or buy government bonds.

      Are there any other channels to increase the vertical money stock?

      If not, let’s assume the sum of 1 & 2 is less than the sum of tax payments and government bond sales required over the next accounting period given the expected fiscal deficit.

      The Greek or Spanish or German or any other EMU nation domestic private sector (DPS) then has two options. It must run down existing euro balances to pay taxes or buy domestic government debt. Or it must sell assets to existing foreign euro holders.

      The individual EMU nation states’ DPS then reduces the share of liquid assets in its portfolio (portfolio composition effect), as well as its net worth (portfolio size effect).

      And this is the route to increasing financial fragility in the EMU nation states DPS.

      So in the name of achieving some sort of arbitrary thresholds that are associated with something being called fiscal sustainability, Greek or Spanish policy makers (and other eurozone members facing similar arrangements) are placing their DPS on a financially unsustainable trajectory.

      Nor does there appear to be any price mechanism that insures items 1 & 2 will at any point in time be consistent with existing DPS net saving objectives, never mind full employment.

      1. Diego Méndez

        Auerback, Mind the GAAP and others,

        the problem *never* is money; the problem is resources. Money is just a resource indicator.

        If you take Brazil or Mexico in the 80s, a decrease in oil and commodities’ prices meant their resources had far less value than before and they couldn’t pay for their external debt.

        If you take Germany in the 20s, they didn’t have enough resources to pay for reparations, which showed as hyperinflation.

        If you take Spain as of today, the resources are there. They’re just sitting idle: idle labour, idle entrepreneurs (lacking credit), idle factories and idle hotels. The problem is not that Spanish cars’ prices have decreased 80% (as commodities did in Latin America in the 80s, causing external-debt problems); the problem is people are *not* investing because credit flows too slowly.

        So you ask me: where will the money come? I answer: the money is in those resources. You just have to enable them to convert into money.

        (In technical terms for Auerback: just increase money velocity).

  4. Diego Méndez

    “One correspondent said that one of his sources, with impeccable contacts, anticipates 12 sovereign debt defaults in the EU.”

    And why wouldn’t they just produce high inflation? That would keep their image as non-defaulting, while equating a default and helping an indebted economy. BS.

    1. Mind the GAAP

      How would they create high inflation if there is no credit available? The US has been printing money like hell, and it’s seen very little inflation.

      1. Ian Nunn

        Your statement “The US has been printing money like hell,”.

        Currency in circulation in this crisis has increased at a linear rate over the last 15 years ( The adjusted monetary base over this period has increased by about $1.3 trillion ( Excess reserves have increased by about $1.1 trillion (

        I posed 3 questions to the St. Louis federal reserve and got this reply:

        “>>> The banking system had no voice in the origin of these reserves. Fed actions that increased Fed assets automatically increased the deposits held by banks at the Fed (see any money and banking textbook for the mechanism). Individual banks might try to sell or lend these reserves to another bank, but the banking system cannot change the quantity of aggregate reserves. This is a fundamental principle of central banking.
        2. What form are these reserves in? Currency, Treasuries or other negotiable paper?
        >>> Deposits at the Federal Reserve Banks
        3. Assuming the reserves are in Treasuries, what is the average maturity?
        >>> N/A”

        My take on this is that the $1.2 trillion – if it is new money – cannot be spent by the primary dealers and will never be placed into circulation. I would expect this is a repo arrangement where at the end of the term of the repo, the Fed will return the collateral and withdraw the money created. If this is the case, Bernanke is right to maintain he can unwind this affair.

        Clearly, no excessive increase in currency exists and my understanding is that it will not exist under present conditions.

        I may have a wrong understanding of the Fed economist’s reply to me, in which case these reserves might end up in circulation. However, given the steepness of the yield curve, one would wonder, if they were able to, why these banks hadn’t bought out the curve for an extra 2 or 3% interest on this trillion dollars.

  5. Troy Ounce

    Rogoff assumes that the middle class will be taxed into oblivion, eat humble pie and become serfs by default. Well, I’m not sure about that one.
    People started civil wars for many reasons, but this could be a good one.

    1. Richard Kline

      I’m not quite as certain as Rogoff that we will see actual defaults in the double digits, but I much agree that we will reach default-level situations.

      From my perspective, it’s important to keep in mind that EU members aren’t really sovereign, willed illusions to the contrary. There is an incentive for those in the euro zone to find a solution, though not the mechanisms: voila! an ‘excuse’ to make mechanisms. And, it may be noted, ti will be in many cases the holdouts on greater economic integration who need ‘saving’ and get mechanisms settled upon them. Ireland, Switzerland: “Don’t need yah.” Tune’s changed. Greece, Italy have refused to get their fiscal and tax policies in shape, but when the market puts them on a diet they’ll experience a different reality. The UK hasn’t been willing to get in step. When and as gilts get sawn off at the knees _someone’s_ going to have to help them stand up again, and I’m not betting the US will have that kind of money. Sweden is in the best shape to ride things out, but the country is too small to go it alone if the sharks come after the krona. If I was a betting man, I’d suggest that the EU’s solution might well become something similar to the South American debt repackaging after the 80s debt-driven currency crashes there, where existing debts are acquired at a discount and securitized under EU aegis with guarantees while subsequent bond issues in the area proceed with much higher market rates and expectations of _local_ revenues matched to them. That isn’t quite a ‘default’ situation, perhaps, even if functionally it comes to the same when existing debt is crammed down. A lot of this euro-denominated debt is held by, surprise surprise, German and French banks, and much of the impetus for a solution of this kind would be as a back-door rescue of said banks, just as the Latin American debt restructure was done to reflate functionally bankrupted US money center banks.

      I am glad to see Rogoff get his thumb on the world’s second biggest debt problem, after the US and ahead of (perhaps) China: Japan. Yes, yes, when they started their ‘spend our way to prosperity’ program they had a huge pool of domestic savings to go by, and yes yes, most of their debt is, fortunately for them, yen-denominated with the great bulk of it held domestically. That said, there is no historical precedent for any scenario in which the amount of debt Japan has acquired gets paid back: that’s not going to happen. So what HAPPENS?? B-i-g inflation one assumes, with the concomitant outcome of a currency value plunge. . . . Did I say something wrong? Of course, competitors would be mad as hell if that happened, so an opportune crisis is needed to ‘force their hands.’ And who would ‘rescue’ them if the teetered on the brink? The US? China? The IMF?? I have three words for those options: hah-hah-hah. Will that happen? I don’t know. But that said, Japan is the country in the world which would most benefit _by far_ from a quasi or real default. And if that happens, one could naturally expect China to notch down the renminbi, ‘because of adverse macroeconomic impacts.’

      The point I would emphasize is that sovereign defaults, if and when they happen and most especially if we have a cascade of them or two, aren’t a function of market impacts but of governmental policy choices. Latvia, Ireland, Greece, Abu Dhabi, other such: they are at the markets’ mercy. The EU, the US, Japan, China: they may have bad options, but when they move it will likely be by a deliberate policy. I don’t say a good policy, or a wise policy. Perhaps yes; perhaps not yes. But they will act when some government in power sees a reconfigured currency/debt position more in their interests that other remaining options. —But don’t expect the amount of sovereign debt in the world as of today to get paid back at close to face in today’s valuations. That strikes me as the _least_ likely of all scenarios.

      1. Toby

        Fascinating post Richard, but I have a question.

        You wrote: “if and when they happen and most especially if we have a cascade of them or two, aren’t a function of market impacts but of governmental policy choices.”

        As I understand it all money comes into existence as interest bearing debt, whether that be at the governmental bonds and treasuries level, or as private/domestic borrowing at private bank level. The interest that must be paid back to the issuer of the debt does not exist in the economy, so must be created too. The additional money created to cover the interest of prior loans is also as interest bearing debt, so we have a mathematical problem in this system. Government policy really has no chance of affecting this process, except by changing the nature of money creation itself.

        The way I see it only two things can happen to keep the current system going: defaults and more debt/money creation. Eventually though, in that our money system is a ponzi scheme variant, the entire structure has to come down, regardless of the fiscal rectitude of governments or corporations.

        I would be interested to hear your response to this.

      2. Best solution

        BS man.

        Pass a law that declare some of those CDO/CDS and swap illegal, than call up Goldman. nullify some of those scam and tricks.

        A lot of those debt are pure BS.

        If goldman acting out, start shooting. That’s how one deal with mafia.

  6. Michael Fiorillo

    Since much of the risk of sovereign default stems from governments whose decision-makers primarily come from the same institutions being bailed out for their reckless so-called “investments” – which in reality are rents that have been extracted from the productive economy – and since these selfsame institutions and their media mouthpieces are now decrying the “unsustainable” debt loads taken on in their name and using the financial mechanisms they control to manipulate the debt of these states, and are calling for destroying the social safety net to pay for it all, is it too soon to ask, “Is this conspiracy or consensus?”

  7. Mickey Marzick Akron, Ohio

    “The debt burden that prompted the financial crisis has not fallen; rather, we are witnessing a dramatic transfer of private-sector debt on to the public sector.”

    And in the process a transfer of wealth to those holding that debt – public and/or private – correct? Or is this so obvious that it doesn’t require explanation? It goes without saying. And with default unlikely, the state has become little more than a structured investment vehicle [SIV] with which to transfer the family silver to the holder of the debts incurred. Looting with a purpose! How long can it continue? Until there’s nothing left to loot.

    The strategy is to get in, skim your % off the top, and exit before the game ends. Think of it as the other road to serfdom – modern day debt peonage – for those who get stuck with the bill when it comes due. Quite an investment strategy when you come to think of it. Besides I don’t owe your children a damn thing do I? My child, KRUGER RAND, will do well fleecing your’s. Just a new twist on the golden fleece…

    Oh, I forgot the bill never comes due… I have to keep telling myself that that’s the part I can’t seem to get past even though history tells me otherwise. My little mind keeps focusing on the relationship between DEBT and FREEDOM. And while there’s not a strict inverse relationship between the two, there is a connection, right? Does conventional economic theory focus on such questions or is it beyond the legitimate scope of such inquiry nowadays?

    But a distinction must be drawn between debt incurred for investment as opposed to that for consumption. The presumption being that in the case of the former the subsequent benefit will offset – pay down – the debt incurred. In the case of the latter, however, since the seed corn has already been consumed, the pay back can only come from future consumption. How do you spell that: A-U-S-T-E-R-I-T-Y!

    Damn, forgive me I forgot again that it doesn’t have to be paid back. Just rolled over… and rolled over… and rolled over… Debt servicing as a way of life onto infinity. A cosmic variant of “rational expectations” theory perhaps? Intergalactic capitalism at warp speed in the starship ENTERPRISE fighting the KLEPTONS. The latter being the more advanced descendants of the KLINGONS.

    I’ll leave the rest to your own vivid imaginations.

  8. Paul Tioxon

    It is necessary to measure what Spain invested in, to see the difference in supplying, say credit cards to the middle class in America in lieu of rising wages vs. a national high speed train system in Spain that over $250 billion USD. The system reaches speeds over 200mph and unites the country in a way that spurred other economic development, real estate built out etc. These hard assets will last for decades and prove useful in the future to help economic recovery. It will help more so than invisible dog fences, the credit card debt settlement industry, and other notable debt crushing exercises, like $3trillion USD nation building in Iraq and Afghanistan. Can’t wait to see the ROI on our war investments.

  9. maynardGkeynes

    Just to point out the obvious, the Rogoff remarks are about the most negative thing I have read from a mainstream figure in a long, long time. It’s not like Marc Faber saying it. Kind of scary….

  10. cougar_w

    The powers-that-be are priming the psychology pump. Bad Things(tm) are coming, and there is no escape possible, and the only choice is to try and set expectations without actually revealing anything.

    I wrote the following as a comment at ZH on the eve of the Sydney central bankers meeting, reposting here in this context as it seems apropos:


    One day in the future the central bankers of the world’s major economies will meet in an out-of-the-way location. They’ll meet for a few days, on the first day in common but after that they’ll mostly ruminate in the halls and gardens in groups of 3 or 4, comparing notes, trying to decide.

    On the afternoon of the third day they’ll re-assemble and sit through a presentation of all the facts and ideas as they are then known. They will sit quietly in their leathern chairs, sipping wine and glancing at each other, sometimes giving the =Is that what you think?= look across the room at another.

    There will much shrugging of shoulders. =Yeah, that’s what I think.=

    At the end of the presentation there will descend a prolonged silence, punctuated only by the sounds of people shifting their weight uncomfortably in padded seats, or returning a coffee cup to a saucer, or lightly coughing.

    “I believe we all know what this means,” the presenter will eventually say into the deep, reflective silence.

    “I don’t think we can just tell people it’s over,” a woman will say from where she stands before a picture window, her back to the assembled.

    “Then don’t tell them,” another man would drawl while lighting a pipe. “They wouldn’t understand if you did.”

    “Unless they have a right to know anyway,” she will say sharply, turning.

    “They have no rights of any kind,” might say a third. “That is the first myth we must dispel.”

    They will go home.

    As agreed, they will say nothing.

    Everything then changes completely but only by degrees, so that the end arrives unnoticed. It is over, and it is not coming back. Where all the wealth went will never be known, just as it was never really known where it had come from. The transient nature of the universe gaveth, and so doing taketh away.

    The history books will not need to be rewritten, they will simply cease to exist.

    Game over. Reset. Would you like to play again?

  11. Tortoise

    Personally, I see sovereign defaults as likely and perhaps advisable. Once a country/state/municipality goes too deeply in debt, it makes no sense to try to continue servicing the debt. A renegotiation of the debt maybe the (certainly painful) solution to the problem.

  12. Marshall Auerback

    You can take the economist out of the IMF, but you can’t take the IMF out of the economist. He clearly doesn’t distinguish the difference between Germany and the US with regards to interest rate determination and solvency risk:

    “It’s very, very hard to call the timing, but it will happen,” Rogoff, co-author of a history on financial calamities, said in the speech. “In rich countries — Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates. They will deal with it.”

  13. Tortoise

    A week ago, Putin gave Papandreou some good advice. He suggested to concentrate on the real economy as opposed to the financial economy of the markets. “(The U.S.) has similar problems – massive external debt, budget deficit,” he added. Whether on likes Mr. Putin’s politics, the advice is sound.

    However, the markets are holding the real economy of most countries hostage. The neophytes of the EU put too much faith in markets as arbitrators and now the EU people will have to deal with the consequences. Sadly, the markets of today are not effective price-discovery mechanisms but the most powerfully insane herd the world has even seen. They are causing one disaster after the other.

    Massive unemployment seems to be in the future of several countries, something that representative democracies cannot easily tolerate. Many a country will default simply to free themselves from the tyranny of the “markets”…

  14. Krazy P

    I was searching for Rogoff’s remarks. I discovered the papers he published prior to “This Time is Different” and his research is sound.

    I don’t buy his forecasting, but I do follow what he says.

    Three potential shocks are worth following. First, debt default is big and could create a shock with unintended consequences. Second, if a bubble pops in China, possible shock there. Hard to know with China – transparency is tough. Third is armed conflict (war) of a major kind. My judgment is that all three potential issues create an environment of relatively high risk for 2010-11.

  15. Jose Luis

    Nice to see the way non-euro countries want to finance their public deficit. I was kind of worried about UK and US economies and their ability to repay their debt. Stupid thing, the governor of England Central Bank has stated a couple of days ago that the UK was not Greece. I felt relaxed. To confirm this feeling I took a look at all these anglosaxon rating agancies (graet job they did in the past) and saw that the UK was rated AAA with very positive outlook. I still remember the AAAAAA+++++ of Lehman Brothers the day before it went bunkrupt. I felt comfortable then and went to slip. My investments in Pounds were not at danger.

Comments are closed.