Sovereign Debt Crisis is Underway

I have written couple of notes on Greece in the past couple of weeks, but I have yet to show you that this problem actually can be a much bigger part of the growing mound of looming landmines in the global economy that has been damaged by the worst economic crisis in more than 80 years.

Last November, Dubai sent tremors through financial markets by announcing it would be ‘restructuring’ its debt. The government later offered its bondholders just 60 cents on the dollar for their investment. Now, Greece’s shaky finances represent another threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain and even the UK, Japan and the US.

That is a lineup of suspects that if under the gun of global investor scrutiny for their respective burgeoning debt problems. Even though one argues that the euro zone and the IMF as they stepped up last week and provided details of aggressive financial aid as a lifeline to Greece, the hope was that Greece’s default threat to be finally been put to bed. My sense, the Greece problem is far from over. Those initial favourable responses to the aid plan are well expected. It has 11.6 billion euros of government debt to refinance over the next month – and another 20 billion euros by the end of the year. Funding from its fellow euro zone countries at best will only allow Greece to roll-over that debt.

The potential debt burden from those next in-line could become even more vulnerable – a recipe for a political and economic disaster in Europe and a potential break-up of the euro. In short, I continue to expect the sovereign debt crisis to continue to build and be cautious of a quick downturn in global risk appetite, especially when the US stock market climbing, almost daily, to new post-crisis highs.

Headlines are usually about what happened already. I fully recognized the extraordinarily optimistic sentiment that now blankets the financial world.