Debt default fears will spread to US and Japan, warns Citigroup's Willem Buiter

Fears about the finances of eurozone nations will spread around the world to engulf the US and Japan, former Bank of England policy maker Willem Buiter has warned.

Willem Buiter believes that 'both Japan and US public finances are unsustainable'

By Emma Rowley 8:00AM GMT 08 Jan 2011

Worries about the risk of a sovereign state defaulting on its debt, which thrust the eurozone into crisis, will soon encompass the two major economies as well, according to Citigroup economists led by Mr Buiter, who sat on the Bank's Monetary Policy Committee.

The team has published a note forecasting much more strife to come in the wake of Greece and Ireland's recent bail-outs and eurozone governments' borrowing costs hitting record highs.

"Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving," the team wrote. "There is no absolutely safe sovereigns."

There are likely to be several sovereign debt restructurings in the next few years, the analysts said, with Portugal likely to need to access the emergency funding facilities soon.

Against this backdrop, the US and Japan - dubbed the "fiscal sustainability deniers" - cannot keep ignoring the question of how safe their public finances are, the team said.

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The fears about default will encompass the two economies "before long", they argued - particularly if a default is defined not just as a failure to meet the debt contract, but also as inflicting severe losses on debt holders through deliberately-engineered inflation or weakening the currency.

"Both Japan and US public finances are unsustainable, in our view, and in the absence of credible and substantial fiscal tightening both would eventually face painful discipline through the markets," the economists wrote.

It is only a matter of time before the US will have to raise funds by issuing debt offering "significantly higher" returns to bondholders, to reflect the level of risk surrounding it, they added.

While the break-up of the eurozone was seen as very unlikely, the analysts believe there is a risk that a lagging member state could leave the monetary union "in a fit of populist and nationalist rage" if they do not get enough external support, despite the high costs of exiting the euro.

There is also a risk that if a weaker member seems to get too much financial help, a major player could depart "on a wave of domestic populist outrage" about having to fund bail-outs.

The economists called for a much bigger liquidity support facility and for a restructuring of the debt of the EU's failing banks and insolvent nations. ... uiter.html