The Next Recession (Whenever it Comes) Will Be About Sovereign Debt

Joshua Konstantinos:

What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. Allowing the collapse of an institution that was too big to fail is what started the deflationary spiral that almost brought down the entire global economy. Although there is always the risk of another similar misstep in any recession, it would be surprising if any central banker allowed the abrupt collapse of a major bank for another half-century or so. However, while it’s unlikely that the next recession will see another Lehman Brothers, the next recession will likely be worse than 2008 – but for a different reason.

The Massive Accumulation of Debt Since 2008
The nations of the world prevented the total collapse of the global economy in 2008 by bailing out their financial systems. However, this was accomplished at an enormous cost. Countries took on massive amounts of debt and this combined with the plummet in tax revenues strained national budgets.
According to the IMF “Leverage in the system has increased some 50%-60% since the financial crisis a decade ago, with debt now worth some 230% of economic output globally” This immense pile of debt – particularly the debt held by governments known as sovereign debt – poses a terrible risk to the world.

Europe is Mired in Debt
In Europe, the massive debt accumulation morphed the 2008 financial crisis into a sovereign debt crisis. Immediately after Lehman’s collapse, yields on government bonds began to rise in some countries as the risk rose that these nations would be unable to service their debt in the recessionary environment. By 2010, the Southern European nations of Portugal, Italy, Ireland, Greece, and Spain (referred to in financial circles at the time as the PIIGS) were in a full-blown sovereign debt crisis which saw the value of their bonds plummet and their costs to borrow soar.