George Kerevan: Sovereign debt crisis is the real story in the rest of the world

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Murdoch dominated the headlines but the real story of the week remained the international debt crisis. Equities went down while oil, gold and sovereign interest rate spreads went shooting up.

The cause was not new economic data, though the US recovery still looks alarmingly weak after poor trade figures on Tuesday. Rather, it was the continuing inability of politicians on both sides of the Atlantic to show leadership on the debt crisis.

In Europe, the latest EU plan to bail out Greece began unravelling because the Germans are insisting that private investors take a haircut on their loans. Predictably, the markets responded by forcing up spreads on Spanish and Italian bonds.

In America, Republicans and Democrats continued their game of chicken over raising US Federal borrowing limits. The US government needs to raise its mandatory $1.3 trillion (810 million) debt ceiling so it can borrow to… er, pay its existing debt commitments. No wonder S&P and Moody's, the credit agencies, repeated warnings they will downgrade US creditworthiness.

Of course, the Republicans and Democrats will do a deal - at the last minute, as always - and America won't default. That's not the point. America's unwillingness to agree a plan to reduce its debt mountain means a credit downgrade is inevitable. A downgrade will end US Treasury bills being the world's financial safe haven and send shockwaves through global investment markets.

Equally, EU dithering over Greece has made a default - however managed, dressed-up or spun - inevitable. Even yesterday's European Central Bank (ECB) stress tests will not give the markets comfort. This latest ECB health check on Europe's main banks factors in only a 15 per cent haircut on Greek bonds. Perhaps 50 per cent would be nearer the mark.

Why are politicians being so ham-fisted in dealing with sovereign debt? Western governments were seduced into borrowing in the nineties when cheap and seemingly boundless credit became available through a unique combination of financial deregulation and the withering of inflationary risks.

But sovereign borrowing limits have been reached, inflation is back, and the interconnectedness of the new global financial system means that a fire in one part soon spreads to the rest.

Now the game is up. America needs to raise taxes while Europe requires mandatory fiscal limits on any country staying in the eurozone. My hunch is this will only come after further credit downgrades persuade politicians we really are living in riskier times. Something Murdoch knows already.

But there's Norway they will be suffering

I've escaped the credit crisis for a holiday in sunny Norway. I'm in Bergen and the town is knee-deep in tourists from passing cruise ships, despite Norway's legendary high prices.

The Norwegian economy is a paradox. Keeping its oil and gas wealth in state ownership has created national wealth and highly-paid domestic employment. For the past 35 years, Norway has assiduously invested its oil revenues in a sovereign wealth fund that now owns around 1 per cent of global equity markets. No sovereign debt crisis here.

However, all is not green in the fjords. The main reason the Norwegian political class invests the country's oil wealth abroad is not out of an uncommon ability to think beyond winning the next election, but because it remains petrified of stoking inflation. The result is the handlingsregelen, a policy rule that limits use of oil revenues to 4 per cent of the total assets in the oil fund. On average only 11 per cent of national budget expenditures are funded from oil.

But this means Norway has not used its oil wealth to invest in local infrastructure to world-class levels.

Norway also has a labour market problem. Not only does it not have enough workers, but ethnic Norwegians remain wedded to a traditional lifestyle that prioritises family, weekends and holidays. True, Norwegians are ferociously hard-working. But they use their productivity to work fewer hours than the rest of us.Wage inflation would long since have wrecked the Norwegian economy but for the fact that there are now 500,000 foreign immigrants in a population of only 4.9 million. Which is why the Russian and American tourists in Bergen are being served by folk from Africa and Asia, while ethnic Norwegians are lying on a Spanish beach.