Old the new young when it comes to fixing the crisis

TWO crises have converged and the impact on global markets is Lehman-like. The sovereign debt crises sweeping through Europe's animal farm dominated by the so-called PIIGS (Portugal, Italy, Ireland, Spain) are sounding alarms. What makes the problem more intractable, according to a Bank for International Settlements report, is the world's ageing population generating unfunded liabilities and reducing state revenue. With less coming in, paying back debt becomes more difficult. The result: chaos for banks and governments.

''Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections,'' the report says. ''The size of these future obligations is anybody's guess. … As frightening as it is to consider public debt increasing to more than 100 per cent of GDP, an even greater danger arises from a rapidly ageing population.''

The BIS report (bit.ly/d8Tboj) puts in context the latest stock market falls which saw Wall Street last week have a nervous breakdown and the Dow Jones fall more than 900 points or 10 per cent. As the Greek parliament passed austerity measures, European markets finished their worst week in 18 months. Traders panicked about contagion and credit default spreads jumped to levels last seen after the Lehman Brothers collapse.

It is also the backdrop to this week's €750 billion rescue ($A1 trillion) package cobbled together by European Union ministers. The agreement puts EU members on the hook, there are still uncertainties and the euro could still collapse if there is insufficient discipline.

According to the BIS, US government debt will rise from 62 per cent of gross domestic product in 2007 to an estimated 100 per cent in 2011. At the same time, Britain's will double from 47 per cent to 94 per cent, Ireland's will skyrocket from 28 per cent to 93 per cent, Greece's level will rise from 104 per cent to 130 per cent and Spain's from 42 per cent to 74 per cent, keeping in mind that unemployment there is 20 per cent.

Why is sovereign debt a problem? In the past, there was higher debt. Indeed, in the aftermath of World War II, some governments' debt levels were more than 100 per cent of GDP. What's different now, says the BIS, are the unstable debt dynamics. Higher debt leads to higher interest rates leading to higher debt.

What's also different is an ageing population. Governments cannot raise revenues they were forecasting before the financial crisis, leaving them with rising and unfunded costs of pensions and health care.

The BIS says that a better way to contain the debt crisis than cutting taxes or pensions would be to encourage older workers to delay retirement.

Now, Australia, a standout performer in the global recession, is expected to be relatively insulated, with a relatively small sovereign debt and a federal budget expected to return to surplus earlier than expected. But the government's intergenerational report warns that an ageing population will put massive pressure on government finances. Health spending will go from almost 4 per cent of GDP in 2009-10 to 7.1 per cent in 2049-50. It will account for two-thirds of the increase in government spending.

This is why the federal government's post-Henry review move to encourage an older workforce by extending compulsory super for workers aged 70 to 75 is a cop-out.