In the era following the 2008 credit crisis, a more acute risk emerged for commodities: the sovereign government risk. This type of risk is more important than other types of risks because it involves the balance sheet of sovereign governments.
During the financial crisis, banks were in a position to bail out consumers; when banks started to fail, governments began to bail out the banks. However, when governments start to fail, few institutions can bail them out.
This type of risk became more evident in the European countries, accustomed to single-digit gross domestic profit (GDP) growth rates and relaxed lifestyles due to generous government programs and pensions. For a number of reasons (geographic, demographic, and economic), these countries no longer enjoy the place in the sun they once occupied, which is leading to the risk that these states may start defaulting.
In addition to liquidity risks, these states pose a solvency risk — in other words, they simply cannot pay back their borrowers.
Many countries in Europe, such as Greece, Portugal, Spain, Ireland, and, to some extent, Italy and France (Germany being the main exception) — are facing severe budget cuts and unprecedented decreases in government expenditure programs. This situation caused riots and violence across Europe in 2010.
As their unfavorable demographic trends further accelerate and their manufacturing base is eroded by more competitive spheres in Asia and other emerging markets, expect to see more belt-tightening in Europe over the next five years. In a post-2008 world, it’s necessary to carefully examine the countries you’re investing in.
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Source:http://www.dummies.com/how-to/content/effect-of-government-financial-crises-on-commoditi.html
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