Investors around the world have been buying government securities for safety, but those investments may not be so safe after all.
Arnaud Mares, an executive director at Morgan Stanley in London warns that governments are facing serious problems such as aging populations and finding more tax revenue. As a result, they may pass some of their losses on to those who bought government securities.
"Governments will impose a loss on some of their stakeholders," Mares wrote in a research report Wednesday. "The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take." The sovereign-debt crisis is global "and it is not over," he wrote.
Rather than miss principal and interest payments, governments may choose a "soft" default in which they pay back debts with devalued currencies resulting from faster inflation or force creditors to take lower returns, Mares said in an interview.
Mares told Bloomberg News that governments may try to use inflation and pay their debts back through money that isn't worth as much, or they just may pay less interest than the bond was originally supposed to pay.