According to the Treasury Department, the global demand for US financial assets strengthened in March to a record level, as investors from China to the UK purchased, amongst others, the largest amount of US Treasury bonds since November 2009. Overall, foreign investors were buying equities, notes and bonds in amount of $140.5 billion in March, after a net buying of $47.1 billion in February. It is a clear signal that foreign institutions and investors are returning to the US as the ultimate safe haven. Not surprisingly, China remained the biggest foreign holder of US Treasuries after its holdings rose by $17.7 billion to $895 billion in March. Japan, the second-largest holder, increased its holdings by $16.4 billion to $785 billion in March. Holdings in the UK gained $45.5 billion to $279 billion. Continue reading ‘The Return To Risk Aversion’
Tag Archive for 'Sovereign Debt'
The controversial economist John Williams once said “If the federal government were a corporation, the President and senior Treasury officers would be in federal penitentiary.” Paraphrasing his statement, I would say: if governments around the world were business school students they would gloriously fail every single subject and get kicked out of school after their very first semester. I have always been a strong believer in the idea that the socialist system was the biggest failure of the twentieth century. It is all understood that socialism does not create a system built on incentives, becoming a theory inconsistent with human nature and ultimately doomed to fail. The recent financial crisis could be considered a failure of capitalism followed by a failure of the governments’ policies. The process of socializing the private losses from this crisis has shifted the troubled liabilities of the private sector (e.g., large banks, financial institutions and households) onto the books of the sovereign. Continue reading ‘Why Bother To Vote?’
After months of indecision, Europe’s politicians came up with a colossal rescue package for Greece, worth €110 billion, in which the International Monetary Fund (IMF) has a contribution of €30 billion. This is a revised sequel of the original bailout plan envisioned a month ago by the EU-16 finance ministers and IMF who had proposed a giant €45 billion emergency aid mechanism. In January 2010, European Central Bank President Jean-Claude Trichet said that the ECB would not change its collateral framework for the sake of any particular country. Following the events of December 2009 and April 2010, when Standard & Poor’s has downgraded the credit rating of Greece to BBB+ and BB+, respectively, Mr. Trichet changed his mind announcing that ECB would accept Greek bonds as collateral for loans regardless of how they were rated by credit agencies. The most representative viewpoint that I have read these days belongs to a German bar manager who said “The government is not telling us the truth. I think Greece needs more money than they are saying. Some say it’s to save Greece, but others say it’s to save the banks. Meanwhile, Greece is getting more broke.” Continue reading ‘Money vs. Politics’
During the second half of 2009, the apparently endless and prolonged slide of the once mighty greenback against most of the other major currencies was primarily attributed to the Federal Reserve’s near-zero interest rate policy. The relatively cheap dollar funding has led to an escalation of the carry trade, where investors were borrowing USD and investing in commodities or higher yielding currencies. We all remember that China, the world’s largest holder of FX reserves, and Russia have both called for a new global currency to replace the US dollar as the global currency reserve. On top of that, Bill Gross – PIMCO manager, claimed that the dollar would continue to weaken as long as the US was pumping massive amounts of money into the economy. According to an Italian money manager, “the diversification out of the dollar will accelerate, and people are buying the EUR not because they want that currency, but because they want to get rid of the dollar.” At the beginning of this year, the median estimate of more than 40 economists and strategists was for the dollar to end the year at $1.47 per EUR. Continue reading ‘EUR:USD – The Sultan Of Swing’
When Greece joined the EMU in January 2001, ECB President Wim Duisenberg was warning that Greece had to adopt a tough austerity program aimed at making deep cuts in public spending. Back then, many investors did not agree with the EU-11 enlargement fearing that the decision would send out the wrong signal to financial markets, suggesting that in future other weaker economies might be allowed in without complying fully with membership conditions. Over the last decade, the Greek government has got involved in manipulating accounting rules and derivatives markets to run up unsustainable debts. By using the swap contracts and not having to record these transactions as debt, Greece managed to scrape in under the Maastricht criteria for EMU membership. This financial engineering helped the Mediterranean country accumulate more debt that would otherwise have been possible, pushing the country deeper into a sovereign debt crisis. Continue reading ‘Greece: Leave The Euro!’
If history taught us something is that during the economic booms, the expansion of the private debt leads to credit-fuelled bubbles. When the economic growth is replaced by financial crises, more borrowers default on their loans and consequently banks report mounting credit losses. At that point, governments intervene by bailing out the banking system and as a result the public debt surges while the private debt collapses. These days, many European countries are facing high public debt levels and large external deficits. It is well known that PIIGS countries should urgently address the public debt issue and most importantly repair their image amongst investors. Under the current Maastricht treaty, it is clear that EU could not provide public financial support to one of its members. Nevertheless, few European politicians are proposing the creation of an IMF carbon-copy European Monetary Fund (EMF) aimed at fixing the current and future sovereign debt crises. Continue reading ‘EMF – EU’s Piggy Bank’
The recent recession in UK, which ended in the final quarter of 2009, has lasted for 18 months, the longest period on record. In order to avoid an utterly economic collapse, the Bank of England (BoE) kept cutting interest rates down to a historical level of 0.5 percentage points. In early February, central bank officials decided to temporary halt the bond-buying program, mainly because the inflation rate rose to 3.5 percent in January. The actual inflation rate surpassed the 2% target rate due to a rise in the value-added tax back to 17.5% after the expiration of a temporary cut to 15%, a 70% increase in the oil prices and the weakness of the pound. The general consensus is that the United Kingdom’s economy is still struggling and the Bank of England will have to continue its quantitative easing program worth nearly GBP 200 billion. BoE Governor Mervyn King said that it is “far too soon” to say the bond purchasing plan will not be expanded. Continue reading ‘UK – Behind The Curve’
Wim Kösters – professor at Ruhr University in Bochum, was one of the 155 German-speaking economists who, in 1998, asked for a postponement of the introduction of the common currency. The purpose of the request was twofold: first, the EU had to ensure the reliability of the government agencies across the region and two, the local governments had to have a good track record of their fiscal policies. Ten years later, the sovereign debt crisis is sending panic waves amongst investors while the European Union is mulling a rescue plan for Greece. On one side, if EU decides to help all these deficit-plagued economies, including those of Spain, Portugal, and Italy, markets expect dear consequences for the European wobbly banking system. On the other side, if Greece leaves Eurozone, the EU credibility will suffer and that could create a snow-ball effect across the European countries. Either way, the EUR is in big trouble. Continue reading ‘Deutschland Uber Alles’
If 2009 was the year of the stellar markets rebound, 2010 might be dubbed the year of the sovereign debt crisis. Since the beginning of the twenty-first century, we have witnessed few corporate defaults (e.g., Enron, WorldCom, Parmalat, Lehman Brothers, and General Motors) that shocked the world. After a period of high number of defaults across the private sector, this year, we are seeing a significant increase in the perceived risk associated with the public sector. Since not all countries are created equal, some governments are clearly better placed to cope with the sovereign debt problem than others. While UK, Japan and the US all have the luxury of issuing debt in their own currency, the sixteen countries that share the common currency do not have the same degree of freedom. Not surprisingly, at the heart of the current fiscal crisis we find Europe, and particularly its southern region. The PIIGS – that is Portugal, Ireland, Italy, Greece and Spain, and the other 11 European nations have debt denominated in EUR. They cannot print more euros to repay the debt or they cannot devalue the currency without exiting the euro-zone. Continue reading ‘PIIGS Sacrifice’
CDS – The Usual Suspect
Credit Default Swaps (CDS) are plain-vanilla financial contracts that allow hedging a credit exposure or betting on whether or not an underlying credit instrument (e.g., a bond, a loan) does experience a specified credit event (typically a default) within a given period of time. In plain English, the CDS buyers make money if the underlying credit name does default, whereas the CDS sellers pocket the profit otherwise. With a total notional amount exceeding $60 trillion, the credit derivatives market has gained notoriety over the last ten years but it quickly became the scapegoat for the subprime debacle, Lehman Brothers bankruptcy and the collapse of the insurance giant AIG. Nevertheless, the CDS market is back on top again, sending shockwaves in the credit world and making it harder for troubled companies or debt-strapped countries to borrow money. Continue reading ‘CDS – The Usual Suspect’