EYE-BALL Guru on – Some CLARITY on Sovereign Debt …

November 30, 2011
Some CLARITY on Sovereign Debt …
The recent Euro solution is for the issuance of EuroBonds– collective debt for all Nations – i.e. dumping the P.I.I.G.S. into a basket with Germany and France in the hope that their strength will prevail …

This is being floated as an idea to gauge the market’s response – see story here – there is no way that Germany – and lets face it – the total strength of the Euro now comes down to Germany – will freely give up its financial position to allow other member Euro Nationsto bleed it dry and raise its own funding costs.

Let us visit another scenario – do American States have Federal Government sovereign risk?  Do Australian States enjoy a luxury of Federal Government protection should a bailout be necessary?

NSW State finances are in a shambles – does the Federal Government give them preferential treatment to help with their debt obligations over and above what they give the other States?

Europe was America without the Union – up until the introduction of the EuroZone.  So the chess game being played out in Europe is a reflection of what might be install for America.  There is a case for the America Federal Government to be the ‘lender of last resort for all their State as members of a Union formed after the 1860’s civil war.

Could a solution to the continuing GFC – and most pundits believe that the GFC is over and now we are in a ‘recessionary’ type downturn – it’s a political spin to try to boost confidence in the consumer markets – be that a consolidation of debt – similar to what Banks do for borrowers who have too many individual debts – will answer the contagion ‘debt’ crisis’ sweeping the globe?

An investor buys State Government bonds because they offer a higher yield but still carry ‘GOVERNMENT’ ratings.  Ratings agencies rate each State as they do Federal debt  – and investors invest accordingly.  The crux is what happens in a default scenario?

Nobody weighted and risk premium on Federal Governments not bailing out their States – this is what is happening in Europe and the EuroZone membership at the moment.  The ‘haves’ i.e. Germany and France – are arguing that they cannot be expected to bail out the P.I.I.G.S. – yet the holders of the debts – the Banks invested their depositors funds in these sovereign debts never expecting a default scenario.

However the EUROZONE ends will set a precedence and will change the risk ratings on all Sovereign Debt … should the investor be responsible for their decisions to invest?  Can they lay the blame at third party ratings agencies for making their decisions?

The GFC happened because Goldman Sacks paid Rating Agencies for AAA rating of the now called ‘sub-prime’ assets.  Look where that ended and that was the final straw that broke the camels back in delivering a Financial Market meltdown.  This has been 40 years in the making and now these short-term – one week or so – news leaks on a solution to the Euro debt crisis are creating volatility swings causing $Trillion’ s in swing values.

Can you really fathom the size of these profits and losses that are being factored into balance sheets every time equity markets rise and fall on  a daily basis?

It was revealed that ‘derivatives’ grew by over US$107 trillion in just first six months of 2011 – see story here – the revelation in this story is that the Banks have been forced to issue these derivatives purely to generate on balance sheet cash flows to stave off default … the world is being lied to on the under currents of Global liquidity within the Global Banking sector …

The perception that Federal Governments will bailout their State Governments is a legal issue with both sides adamant that it will never happen – all that can be said is watch this space …


The EYE-BALL Guru …

  1. BuddaBalls
    November 30, 2011 at 11:09 am

    A genuinely interesting and inciteful post EYE-BALL – will give them plenty to think about …

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