The looming sovereign crisis is looming in.

THE financial strains created by crises in Japan and Europe highlight a growing problem: The rich world is getting close to the point where it won't be able to bear the costs of another disaster.

Japan and Europe face very different crises - one brought on by nature, the other man-made. But from a financial perspective, they are strikingly similar. In both cases, the mounting costs of mitigating disaster are stretching governments' already overburdened finances. In Japan, the advanced world's most-indebted government, the outcome is still uncertain. In Europe, Portugal could soon become the latest country to seek a bailout.

The strains in Tokyo and Lisbon reflect a broader problem: As advanced-nation governments take on increasing responsibility for insulating their citizens, investors, banks and companies from the pain of disasters, they are pushing their financial resources closer to the limit. That, some economists say, could leave them without enough wherewithal to respond the next time a big crisis happens.

"Can we afford another crisis? I think the answer is 'no'," says Raghuram Rajan, an economist at the University of Chicago who served as chief economist at the International Monetary Fund from 2003 to 2007. "We simply don't have the government capacity in many countries to bail out the system again."

As of 2010, the average central-government debt burden among advanced nations stood at 74 per cent of annual economic output, more than triple the level of 1970, according to economists Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard University. That is the highest level since the aftermath of World War II.

The build-up in debt has come amid a major shift in the role that advanced-country governments play during crises. Increasingly, they have stepped in as the insurer of last resort, taking on the cost of everything from rebuilding beachfront communities to guaranteeing the debts of banks and private companies. Ms Reinhart notes that increases in government debt have been particularly sharp in the wake of financial crises - a phenomenon recently illustrated by the US government, which saw its liabilities jump after it effectively took over mortgage lenders Fannie Mae and Freddie Mac.

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