The biggest threat for 2010

The sovereign debt disease is spreading, and looks set to be the big bad news story of 2010.
This time it's Greece that's in trouble – and that's official. Just as the 'don't panic' brigade were telling us not to fret about Dubai World defaulting – not big enough to matter, it's an isolated case, surprised it didn't happen before, etc, etc – a much bigger problem has cropped up.
Greece has had its credit score chopped by one major rating agency, and more of the same could be on the way.
Over the last year or two the rating agencies have copped a lot of flak for reacting much too slowly to the first round of credit crunch damage. This time they've got the red pencils out a bit more sharply, as they sensed trouble building up.
On Monday Standard & Poor's put Greece's A-rating 'on watch' for a possible downgrade. And yesterday, Fitch Ratings cut the country's score to BBB+, the third-lowest investment grade available.
more... The biggest threat for 2010 ? countries going bust - MoneyWeek

Sovereign default was always inevitable... the writing has been on the wall for the last 3 or 4 years, and still governments refuse to do something about it.

You can't spend your way out of a debt crisis unless your are getting positive net return on your investments, which welfare payments don't achieve.

Not to mention that it's been well over a year since the credit crunch and still nothing has fundamentally changed, the lesson has not been learnt, rather bailouts were given to fix the symptoms rather than action taken against the root causes.

That is why it is amazing to me that people can think we are in "recovery" when really we are still just in "limbo" coming off our sugar high from bailouts, fiscal and monetary policy expenditure.

What's I'll be interested to see is if the breakdown of many of these countries is slow or if it will be contagious, ie, the first medium sized sovereign default (greece, argentina, portugal, etc) will be the catalyst for the default of the big players, ie UK and US. Or will the collapse of the US start with an internal problem (ie California).

Looking at the recent CDS rates it looks like Greece's problems is putting a hell of a lot of pressure on Portugal and Spain - both their CDS rates of those two countries have really started to blow out.

So it's looking like we might be seeing some market pressure beginning to mount on the Spanish and Portuguese governments to reign in their spending as well.

Though at the end of the day it seems that it's all well and good for governments to promise spending cuts and revenue raising, but ultimately it comes down to the citizens of those countries needing to walk the government's talk in paying more taxing and working for less, and that will be the true test of whether these sovereign debt crisis's can be avoided. If the mounting number planned Greek labour force strikes are anything to go by it would appear that there are many citizens who don't feel it's their burden to bare.

The strikes are due to the strong union presence in Greece
but the fact is that they can't escape from their debt.

If the government doesn't have enough money they'll have to raise taxes and the easiest solution IMO would be to raise the level of GST.
They have one of the lower ones in the EU @ 19%

This will of course have negative effects on the economy not to mention push many investors and generally wealthier citizens out of the country.

Given the increasing globalisation of the world, packing up and moving country has never been easier, and I'm really hoping economists and historians are tracking the tax tolerance of populations to tax hikes; I'm really interested to know to what degree people are willing to relocate in the presence of increasing taxation.

Given that in most countries 90% of the taxes are collected from 10% of the population government don't have to piss too many people off to the point where they leave for greener pastures to start making big dents into their tax revenues requiring further tax hikes.

Not necessarily, scandinavians from memory have over 20% GST and other EU countries have higher as well so there is room to move

Just because somewhere already has higher taxes doesn't mean that people didn't leave that country as taxes were rising.

Also just because a country is worse doesn't make the country raising taxes still attractive. The propensity to relocate in the presence of taxes would have more to do with the margin between the taxation in an individuals country versus the taxation level of a low tax economy of similar living standards.

So for example if Australia's top tax bracket was to go to up 10% but NZ's also went up 10% Australians might not chose to leave Australia for NZ though they might chose to move to Singapore or Hong Kong if their tax rates stayed the same given then the marginal difference between those developed economies tax rates and Australia's increased by 10%.

Also there is another major problem that has been spawning in many developed economies of late in response to high taxes, that is tax evasion. Tax evasion increases dramatically as tax rates increase. So people begin to engage in cash based transactions, bartering of goods and services or alternative forms of currency in a bid to avoid tax. This seems to be quite an increasing trend in the US of late.

My point simply is that increasing taxation will help with sovereign debt problems, but it's not a simple case of jack up tax rates and expect citizens to cop it on the chin. At the end of the day solving the problem will also have to focus on reducing government spending - which is something that would be disastrous for many economies right now.

Like for example the US private sector is still shedding thousands of jobs every month, but in recent months these job losses in the private sector are largely being offset but the growth in public sector jobs. Now if the markets were to reassess the US's sovereign risk and to conclude that US government needs to start implementing a plan of fiscal discipline to get back to a balanced budget (which they presently don't forecast they can achieve for at least the next decade) would mean the government also would have to start shedding jobs - this of course would sending the US back into recession and unemployment would once again start spiralling up.