This Debt Is Explosive, And it Sits on the Shelf Everywhere, Waiting to go off
Wolf Richter
Testosteronepit.com
Monday, June 16, 2014
I was interviewed by Jorge Nascimento Rodrigues for Janela na web, a Portuguese management site. After what I said, he might never interview me again :-]
1- Sovereign bond yields of some Eurozone peripherals are at historical lows, in certain cases even below yields for US Treasuries and UK Gilts. So the three-year austerity adjustments worked?
Central banks have performed a miracle: separating financial assets from reality. The crassest example is the Bank of Japan. Not far behind are the Fed and the ECB. Japan’s fiscal situation is far worse than Greece’s. Gross national debt is over 220% of GDP. About half of every yen the government spends is borrowed. There is no solution in sight to bring down the deficit. Hence, the debt will continue to balloon. Standard & Poor’s rates Japan’s debt AA-, four notches from the top. Inflation in April was 3.4% for all items from a year earlier, with goods prices up 5.2%. And yet, 10-year JGBs yield below 0.6%. Whoever holds this dodgy paper is getting creamed. But by purchasing every JGB that isn’t nailed down, the BOJ has effectively imposed a peg on yields. “Financial repression” is the result.
Draghi’s promise to do “whatever it takes” has had a similar effect, but less pronounced. To investors, it no longer matters what the classic risks of holding debt are. The only risk that matters is what the ECB will do. With its whatever-it-takes promise, the ECB has effectively given investors the idea that sovereign bonds are a one-way bet.
The Rest…HERE
