What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge.
Investors, then, must be leery of the self-reinforcing dynamic that has many fathers and spreads much of the blame: ad hoc and insufficient policies from fiscal and monetary authorities; decades of balance sheet and savings abuse from the southern euroland periphery; unresponsive and insufficient support from supranational agencies, including the International Monetary Fund; a me-first attitude from developing nations that control global reserves. All of them join the world’s most dysfunctional family – euroland – in telling others what to do, but not listening much.
As a result, deleveraging, fiscal tightening and potential defaults are on the economic and investment horizon. Investors should be in a “risk off” mode. When this is finally over, a lot of parties will owe the world one giant “Scusi”.