Sovereign Debt Crisis Is Now Global

Any doubt that the Eurozone debt crisis is no longer contained but has metastasized into a full-blown global calamity is rapidly being erased by fast-moving events. With the second bailout of insolvent Greece in the works, followed by a ratings downgrade to junk by Standard & Poor's, Moody's has now weighed in with a double whammy. Ireland's sovereign debt has been downgraded to junk status, with a clear signal that the marketplace expects the Irish Republic to require a second bailout package, as was the case with Greece. Moody's has now followed up on its action regarding Ireland with a warning that for the first time in its history, the AAA rating on U.S. government debt is under review for a possible downgrade. This inauspicious development is in connection with the political dysfunctionality that has afflicted Washington policymakers in both the executive and legislative branches over extending the national debt limit.

With ratings collapsing and bond spreads widening throughout the developed world, it now appears that another member of the infamous PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) is descending into fiscal anarchy. Italy is on the verge of requiring a bailout of its own, one which would exceed what has already been allocated to Greece, Ireland and Portugal. In desperation, the Italian senate has voted in favor of austerity measures. Based on the failure of the austerity measures in Greece to prevent a second bailout being required, the desperate action by Italian decision makers is unlikely to work, and has the look of panic rather than thoughtfulness.

Like a tsunami wave that can travel thousands of miles from the epicenter of a major seismic event, the cascading sovereign debt crisis, which had its origins in policy responses to the global financial implosion of 2008 and the Greek debt crisis of 2010, is now ravaging public finances on both sides of the Atlantic. A point may soon be reached where private investors, Eurozone taxpayers and the IMF can no longer cobble together ever-larger "rescue packages," all of which, with perverse logic, require even larger levels of public debt to construct. A dark truth may soon permeate this ballooning crisis; the policymakers have no real solutions, and have just about run out of gimmicks and short-term fixes. The global economic crisis that began with the financial collapse of 2008, far from being resolved or a clear path to recovery being underway, is entering a more dangerous phase, in which sovereign debt reaches the level of unsustainability. The result could very well be paralyzing insolvency among the advanced economies, which could destroy the economic future of an entire generation.