The Rise of Sovereign Risk in Advanced Economies

The Great Recession of 2008-09 was triggered by the excessive debt accumulation and leverage of private agents – households, financial institutions and even a fat tail of the corporate sector – in many advanced economies. And while there is a lot of talk about deleveraging, the reality is that private sector debt ratios have stabilized at very high levels while, as a consequence of the fiscal stimulus to get economies out of a severe recession and the socialization of part of private losses, there is now a massive re-leveraging of the public sector with deficits in excess of 10% of GDP in many advanced economies and debt to GDP ratios expected to sharply rise and in some cases double in the next few years.