Investing report: Who will pay when the game of 'Pass the Debt Parcel' ends?

Watch on our video page here. Watch on YouTube here. Bernard Hickey delivers an Investing Report in association with BNZ, including a look at who will pay when the global game of 'Pass the Debt Parcel' finally ends. Through 2008 and 2009 governments around the developed world effectively took defaulting debt off the hands of private companies and individuals such as banks and some large companies, and put it on the balance sheet of governments. That seemed like a clever strategy at the time as it avoided 'Financial Armageddon', but all it has done is postpone the eventual repayment of the debt and in some cases increase the eventual cost. Investors are now asking whether sovereign states may default or be forced to radically increase taxes and/or cut public spending to ensure they do not default. The best examples of this public imposition of financial pain is evident in Ireland and Greece where public salaries and essential services are being cut. The best and first example of what may happen when the giant game of pass the parcel comes to an end is being played out in Iceland. An Icelandic bank effectively defaulted on its obligations in late 2008, forcing the Icelandic government to take over its obligations. It owed British and Dutch savers 3.5 billion euros and they now want their money back. Initially the Icelandic government simply assumed that taxpayers would be happy to foot the bill from this private company's debt, but a virulent opposition campaign forced a referendum this weekend on whether taxpayers were happy to take on a debt that will cost each taxpayer US$135/month for the next 8 years. Not surprisingly, the voters said no and now the Icelandic government are renegotiating with their creditors. This example nicely crystallises the choices faced by governments and taxpayers. Do they force shareholders and debt holders to take the pain now in the form of massive wealth writedowns, or do they spread the pain out over a larger group of people over a longer period of time in the future? The best current example of this happening in New Zealand is the current move afoot for the New Zealand government to help guarantee the bailout of owners of leaky buildings, who can't afford to reclad or rebuild their homes. They also cannot afford the time or the money to take their complaints through the courts to recover money from developers, architects, buildings, building materials manufacturers, local councils or the central government. So the government is considering effectively transferring the private liability of a few to a public liability of many, aiming to spread the pain out over a larger number of people over a longer time period. Eventually, this cost will be paid for. The question is when and by whom? The other question is around the fairness of transferring private liability to the public sector? The ultimate danger is that our creditors will question the fundamental ability of New Zealand Inc (both the private and public sector) to service and eventually repay its foreign debts, which are set to top 110% of GDP within 4 years.