Thursday, January 28, 2010

Accelerating towards the cliff

Greece is quickly forcing an end-game. I am sure the Davos will have to serve as in impromptu crisis mitigation site for many members of the EU (PIGS).

Meanwhile, the Gilts are getting a bad rap from S&P. I disagree somewhat on the same grounds of my objections on the Japan negative outlook; the UK faces no liquidity risk that beguiles the EU area.

Wednesday, January 27, 2010

Japan downgraded

Standard and Poors, like Moody's is still of the opinion that the gold standard still applies to currencies, taxation policy, and sovereign debt. I disagree.

SINGAPORE (Standard & Poor's) Jan. 26, 2010--Standard & Poor's Ratings
Services today revised to negative from stable its outlook on the 'AA'
long-term rating on Japan. At the same time, we affirmed our 'AA' long-term
and 'A-1+' short-term local and foreign currency sovereign credit ratings on

The outlook change reflects our view that the Japanese government's
diminishing economic policy flexibility may lead to a downgrade unless
measures can be taken to stem fiscal and deflationary pressures. At a
forecasted 100% of GDP at fiscal yearend March 31, 2010, Japan's net general
government debt burden is among the highest for rated sovereigns. Moreover,
the policies of the new Democratic Party of Japan (DPJ) government point to a
slower pace of fiscal consolidation than we had previously expected. Combined
with other social policies that are not likely to raise medium-term trend
growth and with persistent deflationary pressures, we forecast that Japan's
net general government debt to GDP will peak at 115% of GDP over the next
several years.


Greece 10yr up

FOMC report coming out later as well the auction of 42 Billion in 5 year notes.

That sloshing sound you hear is the sound of capital flying across the pond...

Tuesday, January 26, 2010


Sticks and carrots. The U.S. is yet the engine of consumer spending for the world, and it names its own terms of trade regarding access to its markets.

Instability at the strike of a pen. What other country can provide economic stability coupled with the greatest (defense) security agreement the world has ever seen?

Jan. 26 (Bloomberg) -- President Barack Obama had his only trade request last year shot down by lawmakers. He may be lucky to get any through Congress this year as well.

Obama appealed last March for duty-free status on exports from Afghanistan and Pakistan in an effort to boost employment and counter the lure of terrorist groups. After fellow Democrats criticized labor rights in the two countries, the Senate removed the provision from a funding bill.

“Could we have a higher priority than to get this done?” Brenda Jacobs, a lawyer at Sidley Austin LLP in Washington representing apparel importers, said in an interview. “It’s a harbinger of how tough it’s going to be on trade.”

With last year’s defeat in mind, it’s unlikely Obama will take on Democratic allies and fight for still-pending trade agreements with South Korea and Colombia, Jacobs said. At stake are deals that companies such as Caterpillar Inc. and International Business Machines Corp. say are key to boosting U.S. exports and jobs.

“It’s clear that trade is not a priority,” William Lane, Peoria, Illinois-based Caterpillar’s Washington lobbyist, said in an interview. “There is no way to sugarcoat it: The business community is disappointed.”

Monday, January 25, 2010

...and yet demand is strong.


Interesting. It would seem some calls were placed over the weekend to several of the larger European players that "gently encouraged" solidarity over this issuance.

Friday, January 22, 2010

Hellenic austerity measures deemed insufficient...

Credit spreads between Greek and German debt continue to widen out. Again, the liquidity risk inherent in EU debt vs. UK or US debt is not priced properly.

I have mentioned in other places that the EU model is fundamentally unstable, and with the periphery (both literally and figuratively) cracking, the experiment will likely fail.

During times of economic stress, local interests prevail. Its simple human behavior: in times of scarcity, luxuries (world peace, environmentalism, etc.) are abandoned and necessities that are not in plain sight are ignored.

Thursday, January 21, 2010

UK vs. Euro

I have seen several reports that indicate the Euro area sovereign risk situation is more benign than what faces the US and UK. I disagree.

The current spreads between the UK and the Euro area do not accurately reflect the EU countries liquidity risk.

The UK, conversely, does not suffer from this risk as it is a sovereign currency issuer. The UK does not need to "get" pounds in order to "fund" deficit spending in order to stimulate aggregate demand and therefore employment.

As for the U.S., it happens to possess the world's reserve currency in addition to benefiting from the aforesaid sovereign currency issuer status.

Wednesday, January 20, 2010

Hellenic austerity measures deemed sufficient...

London, 19 January 2010 -- Moody's Investors Service today said that the Greek government's Stability and Growth Programme (SGP), which was submitted to the European Commission last week, is consistent with Moody's current A2 rating for Greece's government bonds. However, given the lack of certainty surrounding the Greek government's ability to implement the programme, Moody's negative outlook remains unchanged.


The rating agency notes that the SGP addresses the three most important threats to Greece's long-term creditworthiness that Moody's had previously identified: chronically weak fiscal institutions, the slow erosion in competitiveness and accelerating demographic pressures.

Friday, January 15, 2010


A somewhat disingenuous comparison.

Jan. 15 (Bloomberg) -- Greece’s deficit crisis is
triggering a surge in the cost of insuring sovereign debt from
default on concern there could be a repeat of the turmoil that
followed the collapse of Lehman Brothers Holdings Inc.
“If the market goes much more aggressively against Greece,
surely it’s only a matter of time before that happens to other
countries,” said Gary Jenkins, head of credit strategy at
Evolution Securities Ltd. in London. “The major concern is not
that Greece is the next Argentina, but could potentially be the
next Lehman.”
When Lehman was allowed to fail in September 2008 after
investors withdrew credit lines, the U.S. government had to step
in to prevent a systemic collapse as lending between Wall Street
banks froze. European Central Bank President Jean-Claude Trichet
said yesterday Greece won’t win any special treatment from
European officials as it seeks to reduce the shortfall from 12.7
percent of output in 2009 to less than 3 percent in 2012.
The cost of insuring against losses on sovereign debt
surged to a record high in Europe this week. The Markit iTraxx
SovX Western Europe Index of credit-default swaps on 15
countries from Greece to Germany rose 0.5 basis point to a
record 77.5, according to CMA DataVision prices at 1 p.m. in

Thursday, January 14, 2010

Negative Event Clustering

The incentive to falsify official statistics are clearly very strong in weaker political jurisdictions. and governments would be loathe to "open up their books" to independent auditors in a similar fashion to large U.S. and European companies.

The spreads question apparently contains an element of trust: investors can be more comfortable with company representations rather than the country in which they are domiciled.

More conclusions already examined by Minsky.

By Tony Barber in Brussels

Published: January 12 2010 13:59 | Last updated: January 12 2010 17:23

Greece was condemned by the European Commission on Tuesday for falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics.

In a damning report ­published as the eurozone grapples with its worst financial crisis since the euro’s launch in 1999, the Commission said figures from Greece’s were so unreliable that its budget deficit and public debt might be even higher than government had claimed last October.

At that time Greece estimated its 2009 deficit would be 12.5 per cent of gross domestic product, far above 3.7 per cent predicted in April. It revised its 2008 deficit up to 7.7 per cent from 5 per cent.

The data shocked and angered Greece’s 15 eurozone partners and prompted swift downgrades of Greek debt as well as an increase in the premium demanded by financial markets to buy Greek bonds

Wednesday, January 13, 2010

U.S. Bond auctions

The threats of Moody's to remove the AAA rating for U.S. government debt continues to fall on deaf ears.

The last two bond auctions have been met with very strong demand. Todays settlement of 1BP more than offer price confirms this.

Sovereign/Corp spreads widening...

...see FT article below.

We should see these spreads narrowing quickly. An arbitrage play that assigns less risk for citizens than the country they inhabit cannot last. This misprices the ability of EU corporate giants to relocate capital and personell to other jurisdictions.

Note as well that the combined risk of default by all the EU countries is at issue. If these EU countries "defaulted", one would think the 125 companies would experience balance sheet pressures on a tectonic scale as well.

By David Oakley in London
Published: January 12 2010 19:47 Last updated: January 12 2010 19:47
The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies.
It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.
Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.
Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt.
By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp.
Bankers are even warning that big economies, such as the US and the UK, could lose their top-notch triple A status because of the deterioration in public finances.
Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets, said: “The US and the UK could be downgraded because of their debt levels.
“Countries, such as Greece, are in a worse position, whereas many corporates look in relatively good shape.”
The cost to insure Greece, which saw its stocks and bond markets tumble on Tuesday after the European Commission said there were severe irregularities in its statistical data, has risen 140bp since September, to 263bp. This is six times more than leading companies such as Unilever, BP and Deutsche Post.
Before the financial crisis, the cost to insure sovereigns was lower than corporates. In August 2007, Greek CDS traded at 11bp, while Unilever, BP and Deutsche Post all traded around 20bp.
Bankers caution that liquidity in the sovereign CDS markets is still low, meaning that just a handful of buy orders can move prices sharply. Liquidity in the corporate CDS market is much higher.
However, even in the highly liquid sovereign bond markets, the debt of governments, such as Greece, is cheaper than many corporates.
Greek five year bond yields, which have an inverse relationship with prices, are 4.75 per cent compared with Deutsche Post’s five year bonds at 3.174 per cent, BP at 3.178 per cent and Unilever at 3.312 per cent


This blog will be dedicated to the analysis of sovereign capital markets. Since a great deal of factors contribute to international price movements and capital flows, a holistic approach will be emphasized.

When appropriate, philosophical discussions ("what defines a sovereign state or jurisdiction") will also be included.

The world we live in is fascinating, the flows of power, wealth, growth, conflict, and compromise form the skene of our lives and the theatre we observe. However, this blog will focus more on the behind the scenes preparations of the actors, and, to the extent possible, the mind of the playwrite.