Watch Out for Sovereign Default in Disguise: Analyst

Governments in Europe and elsewhere could use creative methods to impose losses on creditors, avoiding an outright default on sovereign debt, according to Morgan Stanley research analyst Arnault Mares,

In a research note released Wednesday, Mares said that "insolvency ceases to be merely possible and becomes plausible."

"This crisis is not limited to the periphery of Europe," he wrote. "It is a global crisis and it is far from over. We take a high-level perspective on the state of government balance sheets and conclude that debt holders have to be prepared to enter an age of 'financial oppression.'"

The financial oppression from countries such as Greececould come in various ways, such as repaying debt in devalued money, taxation or regulatory incentives for institutions to purchase government debt at "uneconomic prices," Mares said.

"Financial oppression has taken place in the past as an alternative to default in countries that are generally considered to have a spotless sovereign credit record," he added.

Examples include President Franklin D. Roosevelt's administration revoking gold clauses in bond contracts in 1934 and UK Chancellor of the Exchequer Hugh Dalton issuing perpetual debt at an artificially low yield of 2.5 percent in 1946-47.

"Against this background, it seems dangerously optimistic to expect that sovereign debt holders can be continuously and fully sheltered from partaking in the loss of wealth and income that has affected every other group," Mares said. "Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view. But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take."