The sustainability of sovereign debt hangs heavily over bond markets, and the prospects for economic and financial stability.
Since 2007, Organisation for Economic Co-operation and Development government deficits have risen by 7 per cent of gross domestic product to just more than 8 per cent, and debt, excluding contingent liabilities, has risen by about 25 per cent of GDP to just more than 100 per cent. The biggest increases have occurred in Iceland, Ireland, the US, Japan, the UK, and Spain. There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint. In several European Union member states, the threshold has already been breached. The spectre of sovereign default, therefore, has returned to the rich world.
Default does not have to mean outright debt repudiation. It can mean some type of moratorium on interest payments, and the restructuring of loan terms. Richer nations are assumed to be above such measures, but not in extreme circumstances. The US abrogated the gold clause in government and private contracts in 1934, and in 1971, it abandoned the gold standard altogether. Default can also occur through inflation, currency debasement, the imposition of capital controls, and the imposition of special taxes that break private contracts. Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default.