sovereign debt

Anti-contagion measures being discussed right now by EU finance ministers might be just a smokescreen for unprecedented action by the ECB. So says Erik Nielsen, chief European economist at Goldman Sachs.

Markets reacted negatively to the Greek bail-out, with equities falling, the euro falling and a rising cost of risk. In other words, markets began to price in a greater chance of contagion. EU finance ministers meeting today want to agree anti-contagion measures before markets open tomorrow. A statement issued Friday said all institutions of the euro area agreed “to use the full range of means available to ensure the stability of the euro area”. Read more

Ralph Atkins

Jürgen Stark has warned of a “full-blown sovereign debt crisis” unless governments take ambitious steps to bring public finances under control, saying the UK, US and Japan face even greater challenges than the eurozone.

His comments were sparked by the escalating crisis over Greece’s public debt, but he played down the idea of the ECB offering Greece a lifeline in an extreme scenario by buying its government bonds. This was not an issued being “discussed at present,” he told journalists. Read more

Robin Harding

Dylan Grice of the Societe Generale strategy team put a punchy note out yesterday on the Japan-national-debt-default-or-hyperinflation theme that occurs when one looks at forecasts of 2010 government net and gross debt of 115 per cent and 227 per cent of GDP.

Here’s a taster (the note has also been written up in apocalyptic tones today by Ambrose Evans-Pritchard of the Telegraph).

Japan’s government borrows from Japanese households and has done for decades. But Japanese households are retiring, and traditionally retirees run down their savings. So who will fund Japan’s future deficits, which are already within the range identified by inflation historian Peter Bernholz as hyperinflation ‘red flags’? Twenty years ago, who could predict long-term JGB yields below 1%? Who sees uncontrolled inflation as the primary risk facing Japan today?

Government debt cannot rise indefinitely as a share of GDP, while the greater the stock of debt and the greater the flow in any given year, the greater the chance of a crisis. I don’t agree, however, that (a) Japan is about to run out of domestic savings to fund its deficit or that (b) the most likely nature of the final crisis is hyperinflation.

As Mr Grice argues, Japan’s household savings are in decline as the population ages. Governments that need to borrow from overseas – most seriously those that need to borrow in a currency they cannot print – are in much greater danger of a debt crisis.

Japan is still very far from that position, however. Read more

Clearly they are not, in fact, risk-free (Argentina proved this). But government bonds are nonetheless viewed as the sole risk-free asset, and banks are required to hold certain amounts of them in their portfolios. The risk-free (read: government) rate is also the basis for valuing almost all assets.

Whether this should be the case is a question posed today by Michael Gordon, former CIO of Fidelity. He argues corporate bonds might be a safer bet; some corporate bonds, after all, come with an implicit government guarantee. (Perhaps corporate bonds could be split into regular and TBTF bonds.) If the view caught on, a revolution would lie ahead for markets, involving mass revaluations and financial remodelling.

But his argument assumes all types of bond issuer are equivalent financial actors. I’m not convinced of this. Read more

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds Read more