Financial Crisis - Sovereign Defaults and Dollars

This is a very interesting article from Telegraph. The implications of the article are dire.

Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default

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US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half.
"We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass.

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A disturbing number of states look like Iceland once you dig into the entrails, and most are in Europe where liabilities average 4.2 times GDP, compared with 2pc for the US. "There could be a cluster of defaults over the next three years, possibly sooner," he said.
Research by former IMF chief economist Ken Rogoff and professor Carmen Reinhart found that spasms of default occur every couple of generations, each time shattering the illusions of bondholders. Half the world succumbed in the 1830s and again in the 1930s.

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The author concludes by saying that Europe will be a backwater at the end of this (in a few short years) and we might truly end up with a bipolar (at least economically) with China and US - G2 Nations according to him, leading the world albeit the US with a much diminished role compared to its peak.

It's well worth reading the whole article.

How much of it turns out to be true is to be seen, however much of what has been said has sound reasoning. US - with dollar being the reserve currency, might be able to print (dollars) its way out of this mess. What this does to the dollar is not difficult to guess. Given the massive debt that US has to raise in the short term, and since most emerging markets are in a turmoil of their own, US might have to pay more interest on it's treasuries. Many analysts say one of the most likely ways US will be repaying this debt (if it doesn't default) is by debt inflation. With China making noise about moving out of dollar (it is already having bilateral deals with close to a dozen countries to trade in Yuan instead of dollar) as a reserve currency, how long dollar can sustain without getting severely devalued is to be seen. However, in the short term, since China holds trillions in dollar holdings it wouldn't do anything radical to upset the value of dollar. But, it will not be easy for the US either to run huge deficits like it used and finance it with its treasury notes.

It might be a completely different world in just 10 years from now. (If the holes in Pensions funds, Social Security, Medicare are all taken into account with the baby boomers approaching their retirement age, it makes the picture even worse.)

How it affects us, our lives, our jobs, Indian economy, the geo-political scene is what i am really interested in. As and when i find analysis around this topic, i will be regularly updating it here.