Category Archives: Sovereign debt crisis

A broke Japan bails out Europe

So now Japan is bailing out the at-risk Euro countries.

Japan on Tuesday threw its support behind Europe’s bailout efforts, saying it will take a major stake in a bond offering for Ireland later this month by one of the special funds set up in the wake of the euro-zone sovereign debt crisis.

The government plans to buy more than 20% of a bond offering by the European Financial Stability Facility, expected some time this month, Finance Minister Yoshihiko Noda said at a press conference. The EUR440 billion fund was set up in June 2010 to help finance bailout efforts.

But where exactly is Japan getting the money from to buy these bonds? Japan’s been running big deficits for years and has debt of 201 percent of GDP, much larger than those European countries. But Japan pays almost nothing in interest rates on its own debt and is buying higher yielding bonds, profiting from the spread.

From a more macro viewpoint, Japan is monetizing the Euro debt just as the Fed is monetizing the US debt. But the difference is huge. These Euro countries are much closer to defaulting than the United States is and the spread between short-term Japanese rates and long-term Euro rates is much larger than the spread between short- and long-term rates in the US. Though Japan’s purchase is “only” 88 billion Euros compared to the Fed’s $600 billion in QE2 alone, Japan has a smaller economy and is taking a much larger risk.

The Yen and Nikkei index fell after the news. Japan should worry about its own fiscal and economic situation before trying (and likely failing) to help others.

Portugal ready for its bailout?

In a follow-up to yesterday’s “Ready for round three of the sovereign debt crisis?Marketwatch is covering the Portugal story. Here’s the lead:

Portugal remained in the spotlight Monday as Lisbon fought intensifying speculation that it would be forced to become the third euro-zone nation to seek a fiscal bailout due to rising borrowing costs.

News reports over the weekend and on Monday said the Portuguese government was under pressure from European Union partners to tap the rescue fund established by the EU and the International Monetary Fund in hopes such a move would quell the ongoing turmoil in European sovereign-debt markets.

Portugal has continued to insist that it won’t need aid but a key test looms on Wednesday when the government attempts to sell between 750 million and 1.25 billion euros ($936 million and $1.6 billion) of three- and nine-year bonds.

Now the part I find most relevant:

The yield on 10-year Portuguese government bonds pressed above the 7% threshold on Friday to trade around 7.14% and likely would have jumped even higher had the European Central Bank not been an apparent buyer of Portuguese bonds, analysts said.

It took Greece 16 days and Ireland 20 days to request EU/IMF aid after their 10-year yields breached the 7% level, said Gary Jenkins, head of fixed income at Evolution Securities. He noted that Portugal has been through the 7% barrier previously and then saw yields retract somewhat.

The cost of insuring Portuguese government debt against default via credit default swaps continued to rise Monday, with the spread of five-year swaps widening by 12 basis points to a record 555 basis points, according to data provider Markit.

A bailout of Portugal could be imminent. But Portugal is a small country and not likely to have any major impact. However, this will only further push Spain and Italy toward bailouts.

And let’s not forget Belgium either:

King Albert II of Belgium on Monday called on the country’s caretaker government to write a new budget in an effort to calm worries the nation will be unable to meet its budget goals, The Wall Street Journal reported. The nation has been left without a formal government since a June election due to disagreements between politicians from the Dutch-speaking north and the French-speaking south. The yield premium demanded by investors to hold 10-year Belgian debt widened by 12 basis points to around 138 basis points, or 1.38 percentage points, the report said, near record levels seen in November. The king asked current Prime Minister Yves Leterme to draft a 2011 budget with a deficit below the 4.1% of gross domestic product agreed with the European Commission last year, the report said.

Europe is a total mess, not that the US is much better. So far, everything that has been done has been stop-gap. Countries with 12 percent deficits propose reducing them to 5 percent. Countries with debt of more than 100 percent of GDP have no plan to reduce them. These countries are only proposing to reduce the rate of decline, but not stop it nor turn things around. Until I see countries with plans to reduce the size of government and balance their budgets, I will continue to worry and write about the sovereign debt crisis and the economic doom it will cause if not addressed.

Ready for round three of the sovereign debt crisis?

First came Greece. Next was Ireland. Next up may be Portugal.

Portugal under pressure to seek EU/IMF aid

Pressure is growing on Portugal from Germany, France and other euro zone countries to seek financial help from the EU and IMF to stop the bloc’s debt crisis from spreading, a senior euro zone source said on Sunday.

Some preliminary discussions on the possibility of Portugal asking for help if its financing costs on markets become too high have taken place since July, the source said.

No formal talks on aid have started yet, a number of euro zone sources said, but the pressure was rising in the Eurogroup, which brings together euro zone finance ministers.

“France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later,” the senior source said, adding Finland and the Netherlands had expressed similar views.

The article continues that Portugal and Germany are denying all the above, but then points out that this was the case before Ireland got its bailout. The article then returns to reality.

The growing pressure on Lisbon follows a sharp rise in Portuguese 10-year bond yields at the end of last week to euro lifetime highs above 7 percent, as investors worried about the prospect of up to 1.25 billion euros of bond supply it will offer at an auction on Wednesday.

The yield of five-year Portuguese bonds on the secondary market is 6.43 percent and 10-year paper trades at 7.26 percent. Economists say a key question for Portugal is how long it can sustain the high yield levels, and the auction will be an important gauge of that.

Portugal and the EU can fight reality for only so long. In all likelihood, the bond market will force Portugal to get help. And then it will force Spain and Italy to do so. Belgium may also need help if they can’t form a government. With the at-risk economies slowing due to austerity and countries like Germany and France giving free money to them, even those countries will be in economic trouble.

How long will Germany and France give away their money to others instead of saving it for themselves? How much longer will the Euro last?

The sovereign debt crisis continue, but the MSM is keeping it a secret.

You really have to dig to find information about the continuing sovereign debt crisis in Europe. The only article on the subject I saw on Marketwatch, a large financial website, had the story buried within a piece about the U.S. Dollar:

Renewed pressure on bonds in the euro-zone periphery, as well as pressure on Belgian debt, helped drag down the single currency, strategists said. Fears that rising borrowing costs could force Portugal to seek a bailout were renewed as Lisbon outlined plans Thursday to tap credit markets next week.

Proposals to potentially require senior debtholders to take write-downs in the event of future bank crises also led to a selloff in peripheral bonds, pushing higher bond yields and the cost to insure the debt.

Even Greek bonds are still falling, with the premium investors demand to own them instead of German bonds hit a fresh intraday high, according to Dow Jones Newswires.

I searched and couldn’t find any details at The Wall Street Journal.

Thankfully, Bloomberg has the story:

Portuguese Bonds Lead Peripheral Euro-Area Decline Amid Looming Auctions

Portuguese government bonds led declines by securities from the euro-region’s most indebted nations amid concern demand at auctions next week may flag.

Spanish 10-year bonds fell, driving the extra yield investors demand to hold the securities instead of similar- maturity German bunds to the highest in more than a month. The European Union proposed yesterday that bank regulators be granted powers to write down debt in future crises. Belgian debt dropped amid a political impasse. German notes were little changed after the U.S. added fewer jobs than analysts estimated.

The yield on Portuguese 10-year bonds rose 16 basis points, after a 27 basis-point increase yesterday, to 7.34 percent at 4:24 p.m. in London. The 4.8 percent security maturing in June 2020 fell 0.955, or 9.55 euros per 1,000-euro ($1,295) face amount, to 83.10. The yield is up 33 basis points since Dec. 30.

The cost of insuring against default on European government debt, measured by the Markit iTraxx SovX Western Europe Index, increased four basis points to a record 217. Contracts on Portugal rose 10 basis points to 535, the highest level since Nov. 30, according to CMA. Spain increased 4.5 basis points to 353, Italy climbed 9 to 251, and Belgium reached a record 249.

Spanish 10-year yields climbed three basis points to 5.52 percent. The yield premium to bunds increased to 263 basis points, after reaching 264 basis points, the most since Dec. 1.

Italian 10-year bond yields rose four basis point to 4.82 percent, with Irish yields increasing six basis points to 9.25 percent.

In case you thought the sovereign debt crisis was over, just the opposite. We are still in the early stages of it.

China to bail out Spain. Good or bad?

I previously wrote that “China has surpassed the United States as the lender of last resort.” Now, there is more evidence for this:

China is confident Spain will recover from its economic crisis and Beijing will buy Spanish public debt despite market fears of an Irish-style bailout, a top Chinese official said Monday.

The comments by Vice Premier Li Keqiang were made in an op-ed piece in Spain’s leading daily El Pais one day ahead of his arrival in Madrid for a three-day official visit, the start of a European tour that will also include Britain and Germany.

“Since China is a responsible investor country in the long-term on the European financial markets, and in particular in Spain, we have confidence in the Spanish financial market, which has been translated into the acquisition of its public debt, something we will continue to do in the future,” he said.

“China supports the measures adopted by Spain for its economic and financial readjustment, with the firm conviction that it will achieve a general economic recovery”, said Li, who is widely tipped to become China’s next premier.

It remains to be seen if this is good or bad. If China acts responsibly and withdraws their support if Spain fails to hold to their austerity measures, China is simply helping Spain avoid steps necessary to fix its mess and encouraging other countries to act irresponsibly too. But if China really forces Spain to cut back on its deficit spending, this could provide Spain the temporary support it needs to get its fiscal situation back on track.

My major concern is that China is still controlled by a ruling class that has its own interests in mind more than the economic well-being of the Spanish. China would hate to see the world economy decline and has every reason to prop it up. China figures that every year it can grow faster than the rest of the world, it becomes all that much more important and powerful. A collapse in the worldwide economy now would take China down with it before the country has a chance to flex its muscles. China would rather prop up the world for another ten years, by which time its power will have grown immensely.

Or I could be over-analyzing things. China could be making an investment and, if correct, a very profitable one. But with China’s secretive government, one never knows what they are really thinking.

Two more downgrades. Sovereign debt crisis continues.

First:

Hungary faces the risk of further downgrades of its credit rating after Fitch Thursday cut Hungary’s sovereign debt by one notch to BBB-.

The risk of a further downgrade of Hungary’s credit rating could increase in case of further intensification of the euro area crisis, said Citigroup economist Piotr Kalisz. Citi doesn’t expect a downgrade to non-investment grade in the near term, but markets could start pricing in such a risk especially if the government fails to present a credible fiscal adjustment plan.

Although the downgrade came as no surprise, the forint reacted by weakening to the euro. Fitch followed Moody’s Investors Service Inc. and Standard & Poor’s Corp. in putting Hungary’s rating to one grade above junk.

Second:

Fitch Ratings on Thursday downgraded Portugal’s credit rating to A+ from AA-. The agency also downgraded Portugal’s short-term currency rating to F1 from F1+. The Associated Press said that Fitch cited a slow reduction in Portugal’s deficit and a tougher financing environment as reasons for the downgrade. The euro bought $1.3098, an improvement from earlier in the U.S. session, and slightly up from late Wednesday.

Anybody think the sovereign debt crisis is over?

Europe burns! CDS imply 7 to 11 notch credit downgrades. Belgium and France to join the sovereign debt crisis?

First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.

Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.

Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.

What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.

However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.

I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.

Irish Credit Rating Crashes

Just yesterday, somebody told me the Irish credit problem has been solved. With the market indexes trading at or near two-year highs, that would seem to be the case.

But then we get news that Moody’s cuts Irish credit rating by five notches:

Moody’s Investors Service said Friday it has cut its rating on Irish government bonds by five notches to Baa1 from Aa2. The credit rating agency said the outlook for the rating is negative. The downgrade comes after the agency said in November that the most likely outcome for Ireland’s credit rating was a multi-notch downgrade that would leave it within the investment-grade category. “Ireland’s sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government’s balance sheet,” said Dietmar Hornung, lead analyst for Ireland. As well as the cost of supporting the banking sector, Moody’s said the increased uncertainty over the country’s economic outlook and the decline in the Irish government’s financial strength contributed to the downgrade.

OUCH! Ireland’s credit rating drops 5 notches and the outlook is still negative, which means Moody’s could downgrade it even further.

The sovereign debt crisis is far from over.

Britain on the path to tyranny?

The title of my book and the blog is The Path to Tyranny. The book describes how the demand for free gifts from the government leads to tyranny. But this road does not always lead straight to tyranny. It often falls into anarchy first.

Today’s headline at Drudge Report:

ANARCHY IN THE UK: PROTESTERS ATTACK ROYALS!So how exactly does anarchy lead to tyranny? First, I’ll share a couple of quotes from some people much smarter than me.

John Adams in A Defence of the Constitutions of Government of the United States of America:

The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.

Plato’s Republic:

And so the probable outcome of too much freedom is only too much slavery in the individual and the state… from the height of liberty, I take it, the fiercest extreme of servitude.

Montesquieu explains exactly how anarchy leads to tyranny in his Considerations on the Causes of the Greatness of the Romans and their Decline:

For in a free state in which sovereignty has just been usurped, whatever can establish the unlimited authority of one man is called good order, and whatever can maintain the honest liberty of the subjects is called commotion, dissension, or bad government.

I already expounded upon this quote in a previous blog post:

This is the real reason so many today advocate anarchy and anti-globalization. They do not really want anarchy. Instead, they want to establish a situation which would call for immediate order, to be established by the government and “intellectual elites.” First stage is anarchy, second is totalitarianism. These “anarchists” hope they can direct events towards socialism, as they successfully did in Russia in the 1910s and attempted to do in Italy and Germany, though other collectivist regimes beat out the socialists and communists, though both the Fascists and Nazis adopted socialist platforms to win favor among the people.

The ultimate result of the anarchy spreading through Europe is not yet known. History shows that this often, but not always, leads to tyranny.

The situation reminds me of Germany in the 1920s, except that all of Europe and the United States is in a similar situation to the Weimar Republic with huge deficits and debts that cannot be paid off. That led to the tyranny of the Nazis. Will we be able to avoid the mistakes of the past?

Sovereign debt crisis worsening. Governments paralyzed. Solution too hard to swallow.

Despite all the governments’ efforts, or maybe because of them, the sovereign debt crisis is only getting worse. Marketwatch reports:

The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults.

The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%.

The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points.

“Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.”

The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

How long before Europe realizes that bailing out the banks, announcing plans to cut their deficits to 3 percent in four years time, and getting bailouts from EU and IMF will not work? The sovereign debt crisis will continue until these European countries announce balanced budgets effective immediately (2011) or, at the worst case, next year (2012) and that they will never again bail out the banks. They also have to leave the Euro, which is partly responsible for the mess to start with.

Unfortunately, I doubt the European governments will implement these measures. And if they were to do so, the people would be in full revolution. The only easy way out I see is if the economy suddenly stages a huge recovery. Barring that, it looks like things will be getting worse, possibly much worse.