Which governments will not be able to pay their bills?

The ones with private sectors that are not doing well enough to bail out the government.

That should be one lesson of the near default this year of the Greek government. Government finances are important, but in the end it is the private sector that matters most.

If so, those who focus on fiscal policy may be missing important things. Spain appeared to be in fine shape, with government surpluses, before the recession hit. Now Spain is being downgraded and has soaring deficits.

"Academics and market practitioners have not had an impressive record of predicting serious financial downturns or of providing adequate early warnings of impending sovereign economic and financial problems," says Edward Altman, a professor at New York University who has long studied debt defaults by companies and governments.

Mr. Altman's answer is fairly simple: "One can learn a great deal about sovereign risk by analyzing the health and aggregate default risk of a nation's private corporate sector, a type of bottom-up analysis."

After that analysis, using a system he developed with a company called Risk Metrics, Mr. Altman's ranking of European governments now differs a little from conventional wisdom. He sees Britain and the Netherlands as the safest governments, ahead of Germany. Greece is at the bottom, of course, with Italy, Portugal and Spain looking better than it does, but not particularly good.

Looking at corporate strength, he argues, does a better job of forecasting debt problems than do traditional macroeconomic indicators, like gross domestic product growth and debt levels relative to G.D.P.

That analysis is sharply at odds with much current political discourse, which focuses on debt-to-G.D.P. levels and purports to see disaster looming for both Britain and the United States if something is not done immediately to restore fiscal discipline.
It may seem odd to talk of businesses bailing out governments, when the reverse is what appeared to happen over the last couple of years. But government credit, in the end, is based on its ability to collect taxes. A healthy private sector will provide the taxes, if they are to be provided at all.

That is something the bond rating agencies understand, but it is also the opposite of a traditional ratings practice, which was to treat a country's debt rating as a ceiling for the ratings of companies from that country. In fact, the reverse has something to be said for it.

David Fuller's view Following the necessary stimulus required to stem a financial crisis, governments obviously do need to restore fiscal discipline. This is best done with gradualist policies which place the emphasis on cutting excessive public sector spending which helped to create the crisis.

I am impressed with the way the new UK coalition government is addressing this challenge, having inherited a horrendous problem by any measure. Their approach of approximately 80% public spending cuts and 20% tax increases makes sense to me, especially as it is combined with income tax cuts for people on the lowest salaries and some tax breaks for small business. Hopefully, they will grow, hiring more people and generating more tax revenue in the process.

The USA has yet to grasp the nettle of fiscal discipline but pressure to do this is growing. While little may happen before the November election, I think Congress and the White House will need to move swiftly thereafter. Among public spending cuts, I would favour a significant reduction in a sacred cow in the form of grossly overextended military expenditure. I would also favour progressive increases in gasoline taxes until they reach realistic levels within two years. The USA's strong hand is a reasonably healthy corporate sector which has reduced debt and conserved cash. However much of this cash is held by a few leading companies including: Apple, Altria, Cisco, Disney, EMC, Exxon Mobile, GE, Google, Johnson & Johnson, Microsoft, Oracle and Verizon. Note the information technology representation, which remains a Fullermoney secular theme.