Each year, there is an issue that tends to dominate the investing landscape and as such, captivates the attention of traders. For example, in 2009, it was the cancellation of the funeral for the banking industry and a global economic recovery that was the primary theme investors latched onto. In 2008, it was the credit crisis and the impact of Lehmann’s downfall that dominated trading.

So, what will be the most important theme for 2010? PIMCO’s Mohamed El-Erian says it will be the risk of sovereign debt. As the world’s largest manager of bonds, PIMCO is usually up to speed on just about anything that could impact the bond market. So, as we’ve said a time or two in the past, when PIMCO talks, we like to at least hear what they have to say.

Speaking at a briefing in London on Tuesday, El-Erian, who is co-chief executive officer of PIMCO, said that investors must pay attention to the balance sheets of governments in 2010. "It is the year of sovereign risks. Everyone has to recognize sovereign balance sheets themselves are an issue. Sovereigns are called sovereigns for reasons. Everyone gets influenced," El-Erian said.

With reports swirling Monday and Tuesday that a bailout package for Greece will be finalized this week with Germany providing the backstop for Greek debt, it would be easy to conclude that this issue will soon be put to rest. The stock market seems to be telling us as much since the Dow has regained more than 500 points since its February 8th low and just about all the other indices have performed significantly better.

However, as El-Erian implies, this is not a quick-fix situation. Using Greece as an example, it appears that a bailout is on the way. Yet a major requirement for any kind of EU/European assistance is that Greece substantially cut its debt-to-GDP ratio. This means putting the government on an austerity plan, which in effect, insures that the recession will continue. And while this sounds fine from an economic standpoint, the Greek labor unions are none too happy about reductions in pay or job cuts. Thus, public unrest and the ensuing political difficulties mean that the plan may not be easy to implement or go work out perfectly.

Next up, there is the rest of the PIGI’S (by the way, we like our acronym much better than the more popular PIIGS). Rest assured that there is more debt/trouble lurking below the surface here. And in short, whatever is done for Greece will likely need to be done for the likes of Italy, Spain, Portugal, and Ireland.

Then there is the talk about the deficit problems in the U.K. However, El-Erian points out that the U.K. has options that Greece does not. "It has a high deficit, however the UK has a certain ability to adjust and markets are starting to recognize that. Unlike Greece, the UK has more than fiscal policy to adjust. Adjustment process is easier than when you have only one policy," he said.

While the Greek situation may appear to be resolved in the near future, as El-Erian suggests, this is not a problem that is likely to disappear completely this year. The issue of sovereign debt reminds many analysts of the early stages of the mortgage crisis. As such, it is probably a good idea not to forget that once you see a single cockroach, there are usually more sightings to come.

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