It was posted exactly two years ago

It was posted exactly two years ago on

Friday, November 27, 2009

Just a REMINDER, republished exactly the same!

Few days ago, inquiring minds asked Nobel Prize Krugman about debt/GDP ratio comparisons. There is a bizarre school of thought who tend to think that sovereign public debt does not matter or debt can be accumulated for long time without sustainability and solvency problems.
The Dubai crisis is simply reminding us: a) the financial crisis is not over b) any debt needs to be paid back, no matter if it's private or sovereign (or a mix of the two).
In the case of Dubai, Buiter is stressing that the debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. Yet financial markets are reacting as if either private or public (sovereign) debt levels are important. As a matter of fact the financial crisis has shown how private debts of banks and financial institutions become public debt and greatly contribute to its growth.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond default has recently increased enormously. Some countries, like Greece, are showing clear sign of Sovereign Credit Deterioration. Bets on rich country bond defaults aim at guessing Which of the “Rich Four” Countries Will Default First?.

Italy is an interesting case as CDS volumes (USD gross notional) and contracts increased both about 48% in one year. Italy has one of the highest debt/GDP ratio of the developed economies and CDS volume is now the highest for an individual country.

So what are CDS and Interest Rates Telling Us? Simply that investors are increasingly worried about debt in the world, particularly industrialized countries and they are hedging long-tail risk.
Although debt as the percentage of GDP is not the only criteria to really assign a viable ranking to the default risk, it's a reminder that investors would like to be paid back sooner or later and all bills have to be paid.
That is why it is so important that you eat debt immediately, on Thanksgiving.
And do not tell people that Dubai is a Black Swan when it's just a roasted turkey as usual.

Euro bonds or Bonds to be alive!

When I published this post about Euro bonds in March 2009 I actually imagined the present situation. Now even the European Commission proposes something along the same lines I sketched them out in my posts. They call it wrongly  Stability Bonds just for cosmetics reasons, to try to be different.
It took the European Commission almost 3 years to understand the situation and table a proposal. It did it collating and collecting material on internet.  Yet the first proposal was made in 1993 by Commission's President Jacques Delors.

The title of the James Bond movie on my post was Never say never again.

Today Spiegel on line International writes: German Resistance to Pooling Debt May Be Shrinking - "Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt". 

After several years it's really time to say Never say never again.

Yet you have a Euro pessimist like Nobel Prize Paul Krugman writing that recent higher rates in Germany is to be seen as market "in effect pricing in a real possibility of eurozone collapse".
I think it's easier to think that actually the market is pricing and pushing the launch of Euro-bonds. Against this backdrop German rates will have to be a bit higher...

I still contend that EU bonds are necessary to further EU economic and financial integration as they are Bonds to be alive. Not just stability. I may technically also add they are now necessary to take European Central Bank out of impasse of buying bonds of doubtful value or incurring losses. De facto the ECB is already running on kind of notional EU bonds, at its expenses...

UPDATE: On issues like organisational set-up and conditions for entering the system of Euro-bonds, I think that it should be possible the transformation of EFSF/ESM into a full scale debt management agency where Member States could initially simply opt to transfer common issuance functions to the agency providing collateral (why not gold or revenues?) and guarantees (joint and several). Germany could even opt-out but it will realize immediately that actually competition within EU in issuing government bonds is not necessarily good and could result just in a beggar thy neighbour wrong policy. I do not see the need of treaties changes in such a transformation. Let's also avoid the proliferation of mechanisms, instruments and facilities as money is money and debt is debt.
UPDATE of 27/11/2011: Reading the press a new option to avoid treaties modifications appears and would also simplify the launch of Eurobonds: to sign a mini-stability pact (along the lines of Schengen for immigration and just among those countries willing to do it with opting-out of some) then to also launch euro-bonds with joint and several guarantees of the mini-stability pact signatories. That means that Eurobonds system can be set up on a voluntary basis among those willing to abide by the rules and conditions of the pact.