Sovereign Debt Risks

CMA has released their Q2 2010 Sovereign Risk Report. Only 8 sovereign issuers (including the US) indicated a lower risk of default in Q2. Average “cost of protection” (ie CDS price — whatever that is actually worth when it comes to sovereign debt) rose by 30% during Q2. Default risks (5 year timeframe) are >50% for the worst offenders (Venezuela, Greece, Argentina) to 11-12% for a standard aa- rated sovereign. The only implied aaa rated sovereigns (3-4% risk of default) are Norway, Finland, US, Denmark, Sweden, Germany.

So much for “safety”. Those who are rushing to sovereign bonds for safety run a real risk of getting slaughtered – for little/no possible upside. It looks more and more like the world is heading into one of its periodic sovereign debt crises. In the past, these cycles have peaked with 30-50% of all sovereigns in default on their debt.


Source: “This Time is Different: A Panoramic View of Eight Centuries of
Financial Crises,” by Reinhart and Rogoff

Interesting consequences of this. (hyper)Inflation in a country tends to lag its sovereign debt default — as a consequence of it. The US and other aaa countries may lag (despite obscene fiscal policies here in the US) – and indeed perhaps even become “more creditworthy” simply because in a world this irresponsible, any raft looks like a “safe haven”. Hard to know how much money worldwide is gonna slosh around looking for any safety it can find. But this cycle will not end well. Think blood. Lots of blood in a global war of creditors and debtors.

As an aside — I would have loved to link to Amazon so you could buy the excellent book cited (and supported this site in the process). But the sharks in our moronic Colorado legislature decided to try to play their part in destroying online commerce – and so Amazon and other “affiliate” programs have now cancelled all their Colorado affiliates. Thus eliminating a number of revenue streams for Colorado Internet businesses and startups. If you live in Colorado and would like to protest (HB10-1193 is the legislation), please contact whichever clown you elected to power. And please don’t buy this book or anything else from Amazon. And please please please vote against all incumbent jackasses this November.

Expect this same sort of nonsense to occur at the federal level soon. [On edit] haha. It has. A Massachusetts congressional jackass named Delahunt just introduced federal legislation to do the same thing. Get ready for the giant sucking sound of more unemployment.

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