Friday, December 18, 2009

Is Sovereign Debt the New Subprime?

Just as many subprime borrowers were unable to make their mortgage payments in 2007 and 2008, investors now fear certain nations will be unable to pay their debts in the year ahead. And sovereign debt defaults are potentially even more catastrophic as they can lead to geopolitical instability, societal unrest and even war. And there will also be economic ramifications for investors worldwide, putting America's (and the globe's) fragile recovery at great risk.

"Sovereign debt" refers to the debt of nations. Just as the U.S. issues Treasuries backed by the "full faith and credit" of the government, other nations sell bonds in order to raise money to pay for programs ranging from armies to public healthcare.

To varying degrees, Greece, Spain, Ukraine, Austria, Latvia, Mexico are just a handful of the nations viewed at risk of defaulting. Meanwhile, Dubai only just avoided a similar fate thanks to a $10 billion bailout from their oil-rich neighbor Abu Dhabi.

Excerpt of a Yahoo article by Aaron Task

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