High sovereign debt levels are causing concerns in global financial markets. This notes looks at the key issues.

The key points are as follows:

– A global blowout in public debt has been a key outcome from the global financial crisis. Aging populations are also playing a role.

– Debt crises in peripheral countries such as Greece and Dubai probably aren’t enough to create a major global problem, and default is highly unlikely in key advanced countries such as the US, UK and Japan. However, high public sector debt and/or measures to deal with it will act as a significant medium-term constraint on growth in advanced countries and could result in more volatile economic cycle overtime.

– Fortunately, compared to key advanced countries, emerging countries generally have low public debt levels, as does Australia. This is another reason to favour emerging country and Australian shares and bonds over US, European and Japanese shares and bonds on a medium-term basis.

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