Thursday, March 25, 2010

Soverign Debt Redux: Spill-Over Affecting Healthy Countries

Lately, we've observed the number of countries in trouble and whose sovereign debt has been both under scrutiny and appears to be signalling a global domino effect ( and (

Greece and Portugal have been front-and center in the news, rattling investors on both sides of the pond, but now another country is now gotten in the mix - China (  Clearly, China is now recognizing that the Euro-Zone problems could affect the tenuous Chinese economy.

Growing concerns about spreading sovereign debt issues got China's attention.  Until recently, China had remained fairly mum on the issue. Yesterday, a senior Chinese central banker warned that the Greek crisis was just the beginning.

“We don’t see decisive actions telling the market we can solve this,” Zhu Min, a deputy governor of the People’s Bank of China, was reported as saying.  One has to wonder, how China will react to this crisis.

His comments caused the Euro to dip to a new 10-month low versus the dollar, and encapsulated a growing worry among a growing group of investors that high levels of government indebtedness is one of the main risks facing the global economy.

Of immediate concern is the Euro-Zone.  A two-day summit of European leaders convenes today and investors need to hear that they have been able to knit together a safety net for Greece, which has had trouble rolling over the €20bn of debt maturing over the next couple of months.

But there is a potentially a more important issue emerging.

The poor reception given to the auction of $42 billion of US 5-year notes on Wednesday points to reluctance among buyers of US government debt.  If this continues, yields will rise, but not for the hope-for reason – economic recovery.  Instead, it will signal a undigestable supply and lack of demand.  This could jeopardize the apparent economic recovery and adversely affect asset markets - particularly equity markets hard.

Moody's investor service, on Monday said that the world's largest AAA rated issuers:  the U.S., Great Britain, Germany and Spain, were all in danger of losing their blue chip status.

Meanwhile the Greek crisis continues in limbo and further raises the prospect that this situation will spread to a global financial crisis.  Yet, no definitive solution appears imminent.

Disturbing is the lack of consensus of how to address the issue.  All potentially affected countries agree as to the magnitude of the problem, but the proposed solutions have absolutely no consensus and have created divisions among the affected countries.  In the case of Germany, domestic controversy and oppostion to jeopardizing Germany's solid financial status have led to heated internal politcal debate.

The only positive note is that troubled Dubai appears to be making progess on its debt issue thanks to commitments from Abu Dhabi

Despite the good news from the Dubai situation, more cracks are appearing in the global dam than are being plugged. 

Marko's Take

Please visit our new YouTube channel at  Our new piece on the legality of the personal income tax will posted within the next several days, followed every week or so by a series of new videos primarily covering more political issues and world events.

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