Commodities Forex News & Analysis

Debts Coming Due in 2012

Approximately $7.6 trillion of maturing government debt, from major economies world wide, will come due in 2012 and the rollover of these debts may be difficult in today’s economic environment. The world leading nations have accumulated a combined amount of debt that is beyond anyone’s imagination. Japan leads the group with $3 trillion and the U.S. not far behind with $2.8trillion. The rest of the pack; Italy has $428 billion, France $367 billion, Germany $258 billion, Canada $221 billion, Brazil $169 billion, U.K. $165 billion, China $121 billion, India $57 billion and Russia has $13 billion maturing in 2012. These amounts do not include interests that are due in 2012.

Even though the refunding of government debt may not be a problem, there are some thoughts to keep in mind. The competition for buyers and the credit ratings of these countries are some issues of concern. Outside the Euro zone, the returns on government debt are low. U.S., U.K. and German 10-year is around 2 percent and Japan is about 1 percent. The yields on these bonds do not keep pace with inflation and are yielding negative returns if held to maturity, factoring inflation. The upside reward for these bonds do not match the risk they carry. The higher yielding Euro zone debt is currently about 7 percent but the risk of default is very high.

The spread among these global government debts is too great. The nations with high borrowing cost will have trouble meeting interest payments. They will have no choice but to enact further austerity measures, however, this will only slow or prevent an economic recovery for these countries. The nations with the low yield will have trouble in attracting investors. A negative return after taking inflation into account is a very hard sell. Investors are not willing to have their money tied up for ten years with less than 2 percent yield.

The escalating government debt problem is nothing new. In the past, governments have been able to refinance because the thought of government default is unthinkable. Sovereign debt has always thought to be risk free. Recent global economic turmoil has made investors rethink this risk free concept. We do not know if any of these governments will default on their debt but when investors are shying away and when these governments are unable to refinance, then it is a self-fulfilling prophecy.

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