Sovereign Debt Defaults Likely Over Next Several Years, Says Rogoff

Global markets tumbled overnight amid fresh concerns about the global economy, and more specifically, the prospect of sovereign debt defaults. 

Standard & Poor’s lowered its outlook for Spain's debt grade as the country's finances worsened. A day earlier, Fitch cut Greece's long-term debt to BBB+ from A minus, marking the first time in a decade the country has seen its rating pushed below an A grade. (Click here for the full story.)

The news doesn't come as a surprise to our guest Ken Rogoff, professor of economics and public policy at Harvard University. As Dubai's recent debt crisis shows, more sovereign debt defaults will be likely over the next several years, he says.

The International Monetary Fund will try to prevent any global economic crisis in the near term says Rogoff, a former IMF chief economist. But, longer-term, difficult decisions remain about how to tackle mounting debt among G8 nations. "We can barely have the political will to raise taxes to pay our own debts," which means less money to pay for bailouts of other creditors, he predicts.

"In a couple of years as U.S. debt explodes, as German debt explodes, and they're all going to be pushing difficult levels, they're really going to start thinking. 'Hmm. Do we really want to cast this safety net?' We've got to scale back," says Rogoff, also co-author of a new book, "This Time Is Different: Eight Centuries of Financial Folly." The book outlines how periods of boom and bust are marked by bouts of overspending and mounting debt, whether by consumers, banks or governments -- just like the current crisis.

Should American taxpayers be worried? Financial crises in Asia during the late 1990s and in Latin America during the '80s largely were regional affairs but higher U.S. inflation is almost a certainty. 

Rogoff, however, is more certain about the future of California, a state strapped by rising expenses and falling tax revenues. They'll be on the brink of default repeatedly, Rogoff says.