The future crisis

“A simple rule is that if you want to know where the next crisis will be, then look at where the leverage is being created today,” says Martin Barnes of Bank Credit Analyst, a research firm. “The answer is in the government.”

From The repercussions of Dubai, The Economist December 3rd 2009.

I am glad to live in Canada, a country which started solving its fiscal problems during the past decade. Canadian politicians are aware of the problem that a mounting debt creates for the economy. Canada’s debt is raising again because of the financial crisis, but the outlook is better than all other G7 countries. There are plans to return to fiscal equilibrium in a few years.

France’s fiscal outlook is grimmer. Its annual deficit will be 8.2% of GDP in 2009, and 8.5% in 2010. The total deficit reaching more the 84% of GDP in 2010. Servicing such debt will impact negatively the economy, which in turn will make repaying the debt even harder.

Government bonds are considered safe, but during the past decade real estate was considered safe too. Argentina defaulted on its public debt in late 2001. After this crisis its GDP was divided by 3, and in October 2002 nearly 60% of argentinians lived under the poverty line. It took 6 years for the country to recover.

I have no idea how the world would react if a developed country defaulted. A crisis of confidence in government bonds could have dramatic effects on the world. Nobody can bail out the government.