arvards Rogoff Sees Bunch of Sovereign Defaults (Update2)

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By Aki Ito

Feb. 23 (Bloomberg) -- Ballooning public debt is likely to force several countries to default
and the U.S. to slash spending, according to Harvard University Professor Kenneth Rogoff,
who in 2008 predicted the failure of big U.S. banks.
Following banking crises, we usually see a bunch of sovereign defaults, say in a few years.
I predict we will again, Rogoff, a former chief economist at the International Monetary
Fund, said at a forum in Tokyo today.
He said financial markets will eventually drive bond yields higher, and European countries
such as Greece and Portugal will have a lot of troubles. Global scrutiny of sovereign debt
has risen as nations including Greece reveal fiscal deficits that have swollen in the wake of
the worst global financial crisis since the Great Depression.
Its very, very hard to call the timing, but it will happen, Rogoff, co-author of a history on
financial calamities, said in the speech. In rich countries -- Germany, the United States and
maybe Japan -- we are going to see slow growth. They will tighten their belts when the
problem hits with interest rates. They will deal with it.
Concern about Greeces ability to fund its debt have roiled financial markets since the
government said it had a budget shortfall of 12.7 percent last year, the highest ratio in the
27-member European Union.
More Than Russia
Greeces debt totaled 298.5 billion euros ($407 billion) at the end of 2009, according to the
Finance Ministry. Thats more than five times more than Russia owed when it defaulted in
1998 and Argentina when it missed payments in 2001.
The cost of protecting Greek sovereign debt from default surged in January, then declined
this month as concern eased over the countrys creditworthiness. Credit-default swaps on

Greek sovereign debt have fallen to 356 basis points from 428 last month, according to
CMA DataVision. Thats up from 171 at the start of December.
Greece just highlights that one of those risks is sovereign default, said Naomi Fink, a
strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, it doesnt justify the situation where
were all in a panic and are going back to cash in the post-Lehman shock, she said,
referring to the global credit freeze following the September 2008 collapse of Lehman
Brothers Holdings Inc.
In an August 2008 interview, Rogoff said the worst is yet to come in the U.S. and
predicted the collapse of major investment banks.
Out of Control
Meanwhile Japan has the largest debt of all, with the Finance Ministry estimating
borrowings of 973 trillion yen ($10.7 trillion) by March 2011, more than the economic
output of the U.K., France and Italy combined.
Japanese fiscal policy is out of control, said Rogoff, 56, who is a member of the Group of
Thirty, a panel of central bankers, finance officials and academics headed by former Federal
Reserve chairman Paul Volcker.
Standard & Poors last month warned that it may downgrade Japans AA credit rating
unless the government comes up with a plan to reduce the debt burden. Bank of Japan
Governor Masaaki Shirakawa last week urged the government to show how it plans to
repair its finances, and Finance Minister Naoto Kan aims to release a fiscal strategy by
June.
Fink said Japans debt is sustainable because more than 90 percent of the countrys bonds
are held by domestic investors, reducing the risk of capital flight. For Japanese investors,
JGBs are risk-free assets no matter what S&P ranks them, she said.
Rogoffs 2009 book This Time Is Different, co-written with Carmen M. Reinhart,
charts the history of financial crises in 66 countries.
To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net