On The German Triple-C Issue: Culture, Clausewitz And Clausius

Submitted by Brandywine Global Investment Management,

“It does seem to be true that the Germans, more readily than other peoples, can withdraw themselves from the exigencies and contingencies of life into a region of Innerlichkeit.” -John Dewey, Columbia University Professor of Philosophy


The issue of Germany and its approach to ameliorating the overleveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an afterthought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a backseat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond.

[ZH - this is why we are so loathsome to take any notice of the rear-view mirror defaults as well as forecast default expectations as liquidity is much more critical than any macro or micro data]

John Dewey assessed German culture and thought in a 1915 book titled German Philosophy and Politics. His essential point was that “the chief mark of distinctively German culture is its selfconscious idealism with unsurpassed technical efficiency and organization.”

While these words were published nearly 100 years ago, they still ring true. In fact, they are very relevant to better understanding the German psyche and their approach to restructuring the debt of their most troubled southern neighbors, Greece and Portugal.

[ZH - short-term pain but medium-term gain on devaluations]

The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

Events in 2012 will establish the path we will pursue. With this uncertain backdrop, investors should assess credit risk premiums with caution, but remain opportunistic to any changes in the macro background.


For the full article, see below:

Global High Yield Perspectives - 4Q 2011-1