KKR Avoids European Sovereigns On Austerity Concerns

Tyler Durden's picture

While we are sure Mitt Romney would not care to comment, private equity firm KKR's Henry McVey is strongly suggesting investors should avoid European sovereigns in his 2012 Outlook. While his reasoning is not unique, it does lay out a fundamental fact for real money investors as he still does not feel that Core or Periphery offer value. Specifically noting that "fiscal austerity among European nations is likely to lead to lower-than-expected growth, which would ultimately increase the debt-to-GDP ratios of several countries in the coming quarters", the head of KKR's asset allocation group sees a slowdown in Europe as core macro risk worth hedging. Expecting further multi-notch downgrades across both the core (more like BBB than AAA) and periphery, McVey also concludes in line with us) that Greece may need to restructure again in 2012 and will disappoint the Troika.


Among the major issues facing the financial sector in Europe, we believe, is that banks have not delevered enough, and our research shows that Greece is again on course to disappoint the Troika in 2012 (Exhibit below shows KKR's much worse estimates than even a consistently downgraded IMF perspective).


Outside the U.S., we believe European sovereigns still do not represent great value, since fiscal austerity among European nations is likely to lead to lower-than-expected growth, which would ultimately increase the debt-to-GDP ratios of several countries in the coming quarters. Hence, we feel that the ratings—and thus future performance—of Europe’s sovereign debt are still at risk. As one can see in the Exhibits below, comparing European sovereign CDS spreads to corporate credit spreads shows that the CDS in many cases are now implying multiple-notch sovereign ratings downgrades.


The CDSs may be overly pessimistic in their interpretation of Europe’s Economic and Monetary Union (EMU) core outlook, but we believe the historical AAA credit rating does not seem to match the current finances of the core either.

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Snakeeyes's picture

KKR are no dummies!


They're probably buying treasuries instead. So yeah, they are dummies. 

slaughterer's picture

Fact: The entire West is planning for fiscal austerity in 2012. 

Result: declines in GDP. 

Current investment strategy: buy stocks (they are cheap, according to Faber, the new CNBS bulltard pumper). 


bank guy in Brussels's picture

13 AAA credit rated countries left in the world (putting aside question of dubious rating agencies etc.)

Of these 13, 9 are in Europe, 7 inside the eurozone

4 are EU countries using the euro:

Finland, Germany, Luxembourg, Netherlands

3 are EU countries not using the euro

Denmark, Sweden, United Kingdom

2 are non-EU countries in Europe

Norway, Switzerland

4 countries outside Europe

Australia, Canada, Hong Kong, Singapore


- The European AAA countries are all the traditionally Christian Protestant majority countries in Europe except for Iceland. The only predominantly Roman Catholic AAA country is Luxembourg, though Germany and Switzerland have high Roman Catholic proportions in their populace, and in Switzerland and other countries now 'no religion' is typical identification among former Protestants. Few Europeans go to church at all.

Of these 13 countries, 8 are constitutional monarchies
(Luxembourg, Netherlands, Denmark, Sweden, United Kingdom, Norway, Australia, Canada - yes, Australia and Canada still honour the UK Queen)

Of these 13 countries, all have an official Germanic language, five of these having English, including former British colonies Singapore and Hong Kong. (Finnish is not a Germanic language, but Finland does have Swedish as official, Finland was formerly joined to Sweden.)

Captain Kink's picture

KKR are no dummies. 

but, but, but....it's  PRIVATE EQUITY!  (running away, screaming and waving hands in the air...)

agent default's picture

If the PSI with Greece goes through without triggering CDSs, the message is clear: There is no way to hedge sovereign debt, and they can default on you with virtual impunity.  This is a worse debacle since the subprime market.  Nobody in his right mind should touch sovereign debt from now on.

Crisismode's picture

But British gold sovereign coins are OK.

Caviar Emptor's picture

Yes, now that haircuts are on the table (because of Greece) everything is so much more complicated! Risk has actually returned to investing. What a concept !

Madcow's picture

just let it collapse and put Europe our of her misery already - 

this is like watching Wyle-E-Coyote with an anvil - supported by fraying twine - above his head.  

the sooner the sovereigns fail the quicker Europe's nations can re-build. 

Jlmadyson's picture

Who in their right minds would be buying any of this save the ECB.

A toxic dump.

Zaydac's picture

This thing has gone beyond debt:GDP. It is now all about cash flow. Which is why the ECB is printing, just like Simon Johnson said they would.

tempo's picture

Have you considered that lending money to Governments (BUYING Govt. debt) is risky and dangerous? All lending by Governments is unsecured!!! The debt will only be paid back if the citizens decide (vote) either to cut the entitlements or increase their taxes. We all pretend that CA bonds are a low risk investment. Really...LA is controlled by illegals that pay no taxes. Did you know it is now legal for an illegal to drive a car without a license and insurance? LA Police can't impound a car driven by an illegal that does not have a license. I guess they give them a ticket which is then trashed.

Caviar Emptor's picture


Article: So much for Cameron's 'moral capitalism'


Prime Minister David Cameron tried to stem the flood of economic crisis today - but found himself floundering around in a wave of City corruption. 

Mr Cameron set out his vision for "moral capitalism" yet failed to tackle the festering issue of bankers' bonuses.

In a 20-minute major speech in London he at least admitted there was a crisis in capitalism and conceded the City gravy-train had got out of control.

But when questioned afterwards he fudged direct action on the bonus culture



Alex Kintner's picture

"Moral Capitalism", now that is a real, no joke oxymoron.

Alex Kintner's picture

Wake me up when they get to ZZZ. (it's nap time anyway.)

fonzannoon's picture

whats with treasuries today?

kralizec's picture

Avoiding Euro Sovereigns...avoiding STD's...it's all good advice.

Jlmadyson's picture

Seriously who is buying debt for what might return pennies on the dollar at best? At the very best. It ain't going to be just Greece soon enough. Europe is Greece and any smart fund manager should well know this by now.

If they have to go to court the party will be up. Same as a Lehman and like GM bond holders as well as many others I'm sure they will be very excited about those returns.

FubarNation's picture

Has anyone heard from Hugh lately?

AldoHux_IV's picture

The sad punchline being of course that no amount of growth will allow for the debt-to-gdp of the world economy to shrink-- despite the emerging market story.