Invesco's Greenwood: UK at risk of sovereign debt crisis

The UK and the US could be dragged into a eurozone-style sovereign debt crisis if they waver on austerity plans, said Invesco's John Greenwood.

The group's chief economist said both economies will be likely to see slow growth this year as they press on with debt reduction plans, but warned any change in policy could see them dragged into a sovereign debt crisis of their own.

"Large parts of the developed economies must focus on debt repayment by restraining consumption and postponing new investment, leading to sub-par economic growth," he said.

"In response, governments initially stepped up their fiscal support programmes but, since debt levels were already high, the additional burden of official sector debt has now triggered a sovereign debt crisis across much of Europe and threatens to do so even in the US and the UK if deficit spending is not curtailed."

Greenwood said this all suggests 2012 will be another year of cutbacks by governments and balance sheet repair, causing low growth and a continued focus on safe haven assets.

"With central bank policy rates in the developed world remaining very low for an extended period, I believe the search for quality assets that generate safe and sustainable yields will continue," he said.

Greenwood also warned European banks and sovereign nations are trapped in a 'destructive' cycle that will continue throughout 2012 and push investors into safe havens,

He said commitments so far from leaders to tackle the crisis have failed to impress financial markets, with banks poised to face another year of problems.

"Banks and sovereigns are locked in a mutually destructive embrace.

"If sovereigns default then banks could face runs, higher financing costs and the need for capital infusions, but if private markets refuse to recapitalise impaired banks, only sovereigns with no fundraising power remain."

The situation is exacerbated by the need for capital. The European Banking Authority said early last month banks in the EU are in urgent need of €115bn.

He said the authorities in Europe should have rolled out a "much bigger bazooka", to tackle the crisis, rather than capping the rescue funds at €500bn.

But he said with too little being done too late, the eurozone crisis will now drag on through 2012.

"The eurozone crisis will persist through 2012 and even beyond, exacerbated by the deepening recession among the heavily indebted southern eurozone members," he said.

Greenwood is at least upbeat on inflation, which he expects will plummet this year as the emerging world's reliance on exports to developed economies causes their own economies to slow, bringing down external inflation from commodities.