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Sovereign Debt Worries Will Last 10 Years: Strategist

Wednesday, 1 Sep 2010 | 4:18 AM ET

Short-term fiscal pressures are more manageable than most investors realize, but problems will be far more difficult to deal with over the next 10 years, according to Andrew Milligan, the head of global strategy at Standard Life Investments in London.

CNBC.com

“There are significant long-term risks from high levels of public debt sector debt," Milligan told CNBC Wednesday. "In Particular, there are potential funding problems, crowding out effects and sovereign debt rating concerns for a decade to come."

“We argue that the impact of tax increases and spending cuts will be more moderate than bearish commentators are arguing," he said. "However, we do warn about the longer-term risks facing governments: unfunded liabilities mean difficult tax and spending decisions.”

Milligan said there are two implications for investors: one, that markets will remain volatile and two, that interest rates are going to be lower for longer.

“The OECD warned that total industrialized country public sector debt will exceed 100 percent of GDP in 2011, something that has not happened since the early 1950s," he said. "In response, governments face considerable political opposition as they begin to implement the largest fiscal consolidation in decades”

“We warn that a major risk is that so many countries are tightening fiscal policy at the same time, hence the multiplier effect could be larger in aggregate,” Milligan added.

Milligan predicts global growth will be moderate and no better than trend for several years to come.

“Hence, the fiscal position will remain vulnerable to external shocks for some time to come; until deficits are lowered from 8 to 12 percent of GDP a year towards say 2 to 4 percent.”

“Even in, say, 2015, a number of countries will face worryingly high levels of public sector debt," he said. "Governments also need to address the additional problems of unfunded liabilities.”

Milligan said debt really matters and that higher public debt means consumers and companies end up transferring their wealth to banks, pension funds and central banks.

Europe â??Doing Right Thingâ??
â?I think Europeans are doing the right thing, and that comes down to the academic research being produced. Itâ??s all very good for us to forecast whatâ??s going to happen in the future, but I think some of the best studies areâ?¦going back and seeing whatâ??s happened on past occasions,â? Andrew Milligan from Standard Life Investments told CNBC.

“If a fiscal consolidation program does not work, policy makers could choose enforced savings flows, for example encouraging banks and other financial companies to own more government bonds, as Japan has de facto operated," he said.

“If austerity packages become politically unpopular, governments could encourage central banks to initiate a period of higher-than-expected inflation," Milligan added. "We warn that investors need to monitor the possibility that central banks implement further rounds of quantitative easing as a ‘Plan B,’”.

- Watch the full interview with Andrew Milligan above.

Contact Europe: Economy

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