Friday 20 Jul 2018 | 07:47 | SYDNEY
Friday 20 Jul 2018 | 07:47 | SYDNEY

US and Eurozone: Emerging markets?


Mark Thirlwell

28 July 2011 17:37

I'm just back from an extended trip overseas where I caught up with a bunch of family members, and for a surprisingly large part of it I had little access to media, electronic or otherwise. As a result, I'm now occupied by a second round of catch-up – this time with what's been happening in the world economy while I was busy been reconnecting with some of the branches of my family tree.

Among the big stories are, of course, the continuing debt crisis in the Eurozone and the deadlock over proposals to increase the debt ceiling in the US. The former is obviously no surprise and is a story which has been rumbling for quite some time.

On the surface, at least, the latter is much more surprising, since it involves what looks like a wholly self-inflicted and quite easily avoidable sovereign debt crisis. US political analysts may well disagree with that assessment, since many of them have been warning for some time of the growing inability of the US political system to function effectively in an environment that is now ferociously partisan. Even so, this still looks like a particularly bizarre case whereby the victim is thinking seriously about shooting himself in the foot or (more worryingly) in the head.

Back in early 2010, I suggested that a major theme for the year ahead would be the return of sovereign risk. This has been one of those nice predictions that just keeps on giving, and one which still shows little sign of losing relevance. To be fair, it was also a pretty easy bet to make, given past experience with financial crises. Both of the big stories mentioned above fit comfortably into this narrative.

They also mesh neatly another important part of the story – an element which I have called the Great Sovereign Risk shift. That is, there has been a striking shift in fears about sovereign risk away from their traditional focus on fears about investments in emerging markets and towards concerns about developed economies. The US crisis is a particularly compelling example of this change. The risks here (at least in the short term) are all political: debt sustainability ratios and solvency estimates are all less important than how the domestic political situation evolves. 

There is also a strong political element to the Eurozone crisis, with the wrangling between various European capitals and institutions. As commentators have started to note, the sovereign risk story in these two cases is increasingly involving the kind of politico-economic analysis that investors would traditionally have used in an emerging market context. One more example of how the divide between developed and emerging economies is starting to erode.

Photo by Flickr user Chris Devers.