Sovereign debt bubble thread

[Sheilbh]

I think a national Bank of Spain would also help ameliorate the banking crisis.  There'd be a lender of last resort which I don't think exists in the Eurozone.  That's part of the reason there's so much pressure on Spanish bonds.  Without LTRO, without a Spanish central bank the assumption is that the Spanish state will eventually have to help recapitalise their banks.  The Commission's said the Eurozone won't help.

Edit: Incidentally here's an interesting piece on the pace of fiscal consolidation in Spain:
http://www.voxeu.org/index.php?q=node/7848

By comparison the much praised and market-credible British fiscal consolidation (with a higher deficit and higher debt) is happening over 5-6 years.

[Iormlund]

If Spanish debt is governed by Spanish law you could do that now, without exiting.  If it's governed by other law exiting won't help.

And of course devaluation and inflation get factored into nominal bond yields.  There's no running away from real interest rates.  That's why Latin American countries all issued dollar bonds.

Plus you would have to add the "fuckers changed the currency on my old bonds" premium.

Whereas now we have to add the 'no fucking light at the end of the tunnel' premium. The question is: which one is bigger. I'd say the latter.

With the current scenario, as being played in Greece you get bailed out, spend years in depressionary limbo and never get to access the market again because as the economy shrinks, debt to GDP keeps growing year after year. And in the meantime you've lost an entire generation to emigration or unemployment.

But if you exit from the EZ, you suffer for some time, start growing again, lower unemployment to the low tens or so and in 3 to 5 years tops you are back in the markets.

My bet, and history seems to agree, is that an investor doesn't care so much about whether a country paid its creditors back in the past. What he really cares about is whether it is in a position to pay him back in the future. That's what we should be working on.

[Admiral Yi]

Not just position.  Venezuela has a tiny debt and they're paying 14%.  Argentina's is small and they're paying 9%.

[Iormlund]

That's still much better than Ireland, Portugal or Greece which can't even access the market. And absent further ECB intervention Spain will be there soon.

[Sheilbh]

Not just position.  Venezuela has a tiny debt and they're paying 14%.  Argentina's is small and they're paying 9%.

That's around the level Spain was paying for much of the 90s.

[citizen k]

The pain in Spain throws investors before trains.

http://www.zerohedge.com/contributed/2012-15-15/pain-spain-too-big-be-contained

[Tamas]

Not just position.  Venezuela has a tiny debt and they're paying 14%.  Argentina's is small and they're paying 9%.

That's around the level Spain was paying for much of the 90s.

Which proves what?

[Tamas]

Nonsense.

I admire your optimism. When the euro collapses, I imagine that keeping up the economic treaties will be pretty hard, as economic chaos will ensue, tariffs and protectionism have to rise. Hell, we are nowhere near that and Sarko is already campaigning with backtracking from the EU.

[MadImmortalMan]

The pain in Spain throws investors before trains.

http://www.zerohedge.com/contributed/2012-15-15/pain-spain-too-big-be-contained

ZH is obviously looking to score points on the **OMG we're all gonna DIE** front, but the numbers are tough to look at and not cringe. 

[Tamas]

The pain in Spain throws investors before trains.

http://www.zerohedge.com/contributed/2012-15-15/pain-spain-too-big-be-contained

ZH is obviously looking to score points on the **OMG we're all gonna DIE** front, but the numbers are tough to look at and not cringe. 

linked there, doom and gloom, but I am not sure about anything anymore:
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/4/12_Richard_Russell_-_Crime,_Chaos,_Collapse_%26_Skyrocketing_Gold.html

[Sheilbh]

Which proves what?

With the exception of Ireland these current unsustainable bond yields are actually just returning to what they were before the Euro.  I think a large part of that is because the market mispriced debt - in large part because European politicians went around talking about unity and solidarity so much.  For example Helmut Kohl said this 'one thing is certain when this Europe in 1997 or 1999 has a common currency from Copenhagen to Madrid and from The Hague to Rome, when more than 350 million people live in a common space without border controls, then no bureaucrat in Europe is going to be able to stop the process of political unification ... The member states of the European Community are now bound in such a way that it is impossible for them to split apart and fall back into the concept of the nation-state, with all of its consequences. That means that we have achieved a key goal of German policy toward Europe.'  I think the markets took that sort of rhetoric at face value and assumed that the EU was pretty unified and that the nation-state didn't matter any more because they were all guaranteeing one another. 

It turns out they were wrong.  If you look at the Eurozone as a whole it's still got lower national debt and a lower deficit than the US or the UK.  But now it's clear we're dealing with individual member states and the risk attached to their debt, especially in the case of Italy, is, if anything, worse than it was in the 90s.

I admire your optimism. When the euro collapses, I imagine that keeping up the economic treaties will be pretty hard, as economic chaos will ensue, tariffs and protectionism have to rise. Hell, we are nowhere near that and Sarko is already campaigning with backtracking from the EU.

I agree it'll be difficult to maintain the EU if the Euro collapses.  But I think the progress in Europe over the last 60 years will mean that we'd replace it with some sort of trading agreement pretty quickly.  Even the French would agree to that after the economic problems of a failing customs union.

Also I just object to your line because it reminds me of the sort of doom and gloom threats you hear from Brussels whenever the European project fails.

[Tamas]

Well, you are easy to speak, you are a Brit, your life and death does not depend on continental Europe

[Sheilbh]

Well, you are easy to speak, you are a Brit, your life and death does not depend on continental Europe

  Our economy depends on Europe to a large extent.  European peace and prosperity are successes of the EU, but they don't depend on the EU and I've no time for the argument made by Brussels that the alternative is chaos, protectionism and probably war. 

In good news:

3.54pm: Fitch has been commenting on the situation in Italy to Reuters, and it is vaguely positive.

The agency's David Riley said it had no plans to take any action on Italy's ratings "at this time." In January it downgraded the country from A+ to A-. Riley said Italy's budget measures would gradually lower its debt, but the government would fall short of balancing its budget by the end of next year. He said in an email:

The fiscal plan is broadly credible and consistent with stabilising and gradually bringing down public debt even with some modest slippage against the balanced budget target.

It indicates again that a credible plan to reduce the deficit is more important and sustainable than one that tries to eliminate it in a year or two.  Monti

Edit:  Of course Brussels analysis was recently leaked.  They worry more about slippage than the markets:

Still, Italy's efforts to meet the headline budgetary targets may be hampered by the depressed growth outlook and relatively high interest rates. The government should stand ready to avoid any slippage in budgetary execution and take further action if needed. Also, any reduction in interest expenditure as well as proceeds from privatisations and real estate sales should be used to accelerate debt reduction.

[The Larch]

And to put the icing on the cake, Argentina has just announced that it is nationalizing YPF. This'll turn mad-max-esque over here at this rate. I'll grab a shotgun just in case.

[Zanza]

How would returning to the peseta solve Spain's problems of high private euro-denominated debts and extremely high unemployment?

A solution of the former would require a private-sector default. However, if e.g. Santander defaults on its euro-denominated debt, its assets in foreign countries would be seized in the bankruptcy proceedings, wrecking Santander. However, if the Spanish people en masse default on their euro-debts to Santander, that might become inevitable.

Not sure how changing to the peseta would all of a sudden create millions of jobs when according to Iormlund and Larch one of the main groups of jobseekers is unskilled workers that used to work in Spain's huge construction industry. Because even with the new peseta I don't see how that industry could be easily restarted. Massive public works?