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Japanisation of the West? A closer look at the looming government debt problem
by Thomas Della Casa, Ayako Lehmann and Mark Rechsteiner, Research & Analysis, Man Investments
August 2010
The world is facing a new situation, whereby developed market countries are confronted with huge government debt piles and risk falling into a prolonged deflationary phase, while emerging market countries are enjoying healthy growth and seeing first signs of inflation.
The quantitative easing measures applied during the crisis were unprecedented so the outcome is unclear. While the global financial crisis exacerbated the government debt in advanced economies, it was already fairly large before the crisis. The crisis served as a catalyst to pinpoint an overdue restructuring issue.
We think that some European countries have to undergo a real debt restructuring within the next 12-24 months, otherwise, a "Eurozone light" currency for some of the peripheral EU countries seems a fairly realistic scenario to us. If structural issues are not resolved over the next 3-5 years, a bond crisis cannot be excluded.
While the Western world can certainly benefit from Japan's lessons learned, Japan only serves to a certain extent as an example, due to the fact that most JGBs are held domestically and the country enjoys a very high savings rate. It remains to be seen whether Japan can lend its way out of deflation now that corporations have paid back their debts.
As long as the USD enjoys the status of a global trade currency, we are more positive about the US economy than European economies. The UK will be an interesting case to watch, as it has its own monetary policy but the GBP does not have the status of a global trade currency.
- Government debt exploded as a result of stimulus packages in most advanced economies. The current deflationary environment allows for further quantitative easing measures.
- The financial crisis was an overdue catalyst to tackle the deficit restructuring problem.
- Western economies are benefitting from Japan’s lessons learned during the balance sheet recession.
- We think that a substantial debt restructuring within the next 12-24 months is necessary. Otherwise, a "Eurozone light" including all the peripheral EU countries seems to us a fairly realistic scenario.
- If structural issues do not get resolved over the next 3-5 years, there may be a bond crisis.
The full report is available below.
Japanization of the West? A closer look at the looming government debt problem