The following graph illustrates another reason why I still remain 90% unperturbed by escalating sovereign debt fears:
What are you frightened of?
I start from the position that people are choosing to be frightened, as a result of bear markets and the credit coronary of 2008. Throughout last year’s rally, people continued to be bearish. Yet as earnings recovered and the economy turned around, there was less and less to be worried about.
Governments that had taken on lender of last resort responsibilities and assumed more debt were about the last thing left to panic over.
Yet in most cases, there’s no solvency issue – or at least not one that will be manifested for generations. A few marginal countries face special problems due to the artificial currency constraints they operate within (Greece, Spain) but even in those countries the ‘unsustainable Government borrowing’ was pretty much as unsustainable prior to the financial crisis.
All that’s happened is certain yields have spiked on impaired liquidity, which turned into a very real solvency issue – but just those few marginal countries.
Widespread austerity by numerous countries in concert could become a concern for economies. But that’s bullish for most sovereign debt, if anything.
I continue to think the market is way ahead of itself (sans Greece, which as I’ve said for months will default) about the risks of a sovereign debt default or a second banking crisis, and probably over the risks of a second downturn, too.
In the UK, for instance, the Bank of England stands ready to unleash more QE which in the short-term can probably override any impact of Government spending cuts by encouraging corporate and private asset holders to put more of their money to work.
Interest rates are low and there’s little inflation out there, so what’s stopping it?
If that changes, panic, but I can’t see it changing anytime soon.
(Source: Business Insider)
