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Crap, Sovereign Debt Downgrades Matter?
Wolf Richter www.testosteronepit.com
After they were downgraded in early August, US government bonds gained upward momentum and yields fell below 2% for the 10-year T-note. Japan, which has danced the downgrade tango for years, is now contemplating the next step, this one from AA- to A+, yet 10-year Japanese Government Bonds are yielding below 1%. Downgrades of sovereign bonds of developed countries make good headlines, but their impact on bond markets has been nil. With one exception: the Eurozone.
In the US, there is beautiful clarity: fiscal policies in Congress are such that 36% of every dollar spent has to be borrowed. What these gargantuan deficits—and the resulting mountain of debt—will do to the future of the country doesn’t matter, at least not to the lawmakers. What matters to them is that the Treasury is able to issue and roll over trillions of dollars of debt every year, a feat that is possible only because the Fed can “print” unlimited amounts of money to buy bonds to prop up their values and force down even long-term yields. Quantitative easing, as it’s benignly called, is a mega-force that easily overcomes—due to its "unlimited" quality—any market forces, including the impact of serial credit downgrades.
The shining example of iron-fisted control by central banks and government institutions is Japan. It expanded its public debt from 66% of GDP in 1989 to a mind-boggling 230% in 2011. Its long-term debt got whacked by every credit ratings agency time and again. A+ is waiting in the wings. This year, the government will borrow 56% of every yen it spends. For more on its Christmas Eve budget massacre, and on the collapse of two pillars that have so far supported these deficits, read.... The Endgame: Japan Makes Another Move.
And yet, JGBs continue to do extremely well. Incomprehensible in a free market. But there is no free market for JGBs. Japan Inc.’s unique institutional setup and cohesive psychology have made it possible to fund 95% of its debt internally. Unruly foreigners only hold 5%.
Eurozone countries lack this dictatorial control over credit markets. At the insistence of Germany, the European Central Bank was given a mandate to maintain the value of the currency, a novel concept for most countries in the Eurozone. By treaty, the ECB couldn’t monetize the deficits of member states. Instead, the countries would be exposed to the brutal discipline of the credit markets, which would enforce, the thinking went, proper fiscal policies. And it sort of worked, for a while.
Now credit downgrades have been hailing down on Eurozone countries, even on those with relatively solid fiscal policies, like Austria, or countries like France, whose deficits and debt levels are lower than those of the US. For some countries, like Italy, funding deficits or rolling over maturing debt at yields they can afford is getting difficult. And Greece is already excluded from the credit markets (though fiscally it’s in better shape than Japan).
But the mere possibility that funding isn’t assured through a central bank makes risk-averse investors leery of the bonds; and risk-seeking investors would demand yields that these countries cannot afford. All because the ECB is governed by laws that were designed to keep it out of the great con game that central banks play everywhere else—though obviously, it has found ways to maneuver around these laws.
Germany and some other countries could agree to allow the ECB to open the spigot all the way and do what the Bank of Japan and the Fed have been doing: buy bonds in massive amounts and include the words “unlimited” and “all member states” in its communications about future debt purchases. It would inspire instant confidence even in the crappiest Greek bonds, and their yields might drop to near zero.
But Germans who were promised a strong euro in return for giving up their sacred Mark would rebel. And so, the ECB will likely toe some imaginary line that keeps member states exposed to the discipline of the markets, and to the impact of credit downgrades. But in most countries, politicians will not be able to make the hard decisions that survival (and success) in such an environment would require. Hence, a crisis that won't go away.
Meanwhile, austerity is taking its toll on Greece. Suicides jumped by 22.5%. Unemployment rose to 18.2%. Pharmacies are having difficulties obtaining medications. More cuts are coming. If there is no agreement with bondholders, the bailout Troika will walk and Greece will default in March. But now, even the Troika is in disarray. Read.... Greece: Disagreement Everywhere.
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The Germans now have to adapt to Japan and US style debt creation because of the flakes they got in bed with - and even if they jump out of the Euro the same problem is there Rx 247 Pharmacy they have to weaken their currency against the rest to export - like Japan and the US have..thanks
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10-year Japanese Government Bonds are yielding below 1%. Downgrades of sovereign bonds of developed countries make good headlines, but their impact on bond markets has been nil. With one exception: the Eurozone.
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It's what I always called the Whistling Past The Graveyard, At Midnight mentality. It's the illusion of safety without the support of evidence to support that expectation. They all play the same debt game, are caught in thew same conditions, and none of them sees the end of the road coming.
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The Germans now have to adapt to Japan and US style debt creation because of the flakes they got in bed with - and even if they jump out of the Euro the same problem is there - they have to weaken their currency against the rest to export - like Japan and the US have - inadvertently (perhaps) - so exports rule when the home cooking isn't feeding the gang - and now it seems, that's what the sovereigns have set up - ah, the unintended cons - export hell - everyone after that consumer who has been handed lousy banks, debased currency, mountains of debt and himself is old, dick dead and doesn't give a shit about buying anything but a new remote and the Laurel and Hardy collection.
I wouldn't bet on it either...read my lips, the EU WILL NOT ALLOW GREECE TO DEFAULT UNDER ANY CIRCUMSTANCES UNTIL GERMANY AND FRANCE ECONOMIES ARE BACK TO HUMMING...which of course won't happen and therefore the EU will continue to play the game of giving Greece their money so that the music continues...Now the the Germans have rolled over on the ECB backdoor printing, the ECB has officially joined Japan and the US in the bond can kicking exercise which should allow the world another 3-5 years to ignore debt issues..
The downgrades had no impact on the US and Japan? Maybe, maybe not.
Actually, their conditions bettered after the downgrades.
Of course, the expectations were that they would worsen.
So no, impact? Maybe, maybe not.
For sure, it had not the expected, propagated impact.
That is what you get actually when you believe US citizens on word. If you dont, well, it is another story.
I wouldn't bet on it....