Following the Worst Crisis Since the Great Depression

"...and Sovereign Debt Crises Tend to Play Out in Four Stages …
Stage #1: Burgeoning Deficits
In a financial crisis government spending increases dramatically in attempts to stabilize the financial system and stimulate economic activity. Tax revenues fall. Fiscal surpluses turn into deficits … and economies with existing deficits keep piling it on.
How it’s playing out …
All sixteen members of the European monetary union have violated treaty limits on allowable budget deficits — some to the tune of more than four times as much! Moreover, the leading economies of the world have all seen their deficits shoot higher, some to record levels.
In fact, the deficit spending that’s gone on in recent years can be summed up as follows: Over 40 percent of world GDP comes from countries that are running deficits in excess of 10 percent.
Stage #2: Ballooning Debt
When economies are contracting or even growing slowly, bringing these deficits back down to earth becomes an unenviable challenge. Governments have to make ends meet by turning to the markets. Then those burgeoned deficits turn into growing debt loads.
How it’s playing out …
When debt reaches 80 percent of GDP threshold, the borrowing costs for governments starts ticking higher and so does the market scrutiny. The IMF says five of the top seven developed countries in the world will have debt levels exceeding 100 percent of GDP in the next four years.
Stage #3: Downgrades
When deficits and debts rise and economic activity appears unlikely to curtail fiscal problems, the credit worthiness of the government falls under intense scrutiny. And that’s when we see downgrades.
How it’s playing out …
Greece’s sovereign debt rating has been downgraded to junk status. Spain has lost its AAA rating and the UK could lose its AAA status if its deficit isn’t addressed. Japan’s outlook has been cut to negative and rating agencies have even warned the U.S.
Stage #4: Defaults
This is the final and most deadly stage. That’s because downgrades only make the vicious cycle of weak economic activity and growing dependence on debt worse.
When investors see more risk, they require more return. Therefore, the borrowing costs for these troubled countries rise. Then it becomes harder to finance spending needs and harder to finance existing debt. And that’s when we see defaults..."