Who’s Buying This Crap

As the European debt crisis continues, the insatiable need to raise NEW debt drives the PIIGS (Portugal, Ireland, Italy, Greece and Spain) back to the bond markets to raise more capital. This is the direct result of running structural budget deficits for long years of times (i.e. spending more than you earn).

Traditionally, the “spread” between what Germany pays (the soundest Euro country) and what the weakest country pays have been limited by the fact that the weaker countries had the implicit backing of the stronger countries, similar to the manner in which Fannie Mae and Freddie Mac were able to borrow just above the US Treasury rate for equivalent maturities since it is assumed that the US government would bail out these quasi-public companies if it all ever went wrong (it has, to the tune of >$400B). Now, however, the gap is very large as cited here:

But after hitting euro lifetime highs of 7.3 percent in the secondary market last Friday, the yield on Portugal’s benchmark 10-year bond has come down to just below 7 percent at Tuesday’s settlement, with traders citing ECB purchases.

These countries are basically insolvent when they have to pay 7% on new debt, which is what a (rational) private buyer would demand as a risk premium to take on the newest, riskiest paper.

But it isn’t going to be that high. Why? Because governments are going to step up and buy these bonds. Japan is now planning on buying 20% of Ireland’s next bond issue, according to this article. I can only imagine how well this is going to go down for Japan’s politicians when Europe begins circling the drain; it is a nice show of solidarity but Japan has their own debt crisis without inter-twining it with Europe’s.

This is similar to when Chase bank, under Bill Daley (the brother of Chicago’s mayor), decided to buy up an Illinois bond issue that might have otherwise demanded stiff premiums to attract (rational) private buyers. When the rational buyers leave, it is time for governments and politically-connected entities to step in, I guess. Until it all falls apart.

Cross posted at Trust Funds For Kids

10 thoughts on “Who’s Buying This Crap”

  1. Illinois bondholders benefitted from the inability of Chase’s stockholders to punish management for taking below market interest in order to gain political favors. Ditto Japanese taxpayers, who are unlikely to gain from the deal now under way to buy irish bonds at worse than market prices.

    We’re short on rational feedback mechanisms here and this is a real fault in our current system, both domestically and internationally.

  2. It reminds me of the pre WWI allances. Think of the then countries as financial institutions, and the royals and government heads as incestuous transnational elite.

  3. TMLutas.

    The world politicians, central banks and financial institutions are so incestuous, for so long, that they can not even comprehend any political opposition. We have here transnational, elite group think.

    They’ll get feedback. Its already started. Only they won’t, and probably can not listen( incest has its costs ). So, the citizens, the mob, the masses, will like water find other means. Only it may well be by then more like shove back, or shove down throats. My worry is that opportunistic infections may flourish. Lenin in WWI Russia, and Hitler in post WWI Germany. Both men with ‘new solutions breaking apart the old, corrupt, order’.

  4. I going to guess that Japan and others assume that Germany is yet again going to pull Europe’s fat out of the fire. One of these days, Germans are going to get tired of being the ox in the yoke Europe’s economy pulling the rest of the continent’s along. Then things might get interesting.

  5. Well, the takers are still taking. I believe the makers will just beat feet to Indiana. Indiana will love to have them, makers get lower taxes, state gets jobs and additional tax income. In time those Illinois takers will overtake the remaining makers and the government won’t be able feed them all. If the government can’t feed the police, fire and emergency response organizations, then anarchy will follow. There have been reports of police being refuse fuel because bill have not been paid. Will fire department man up if there is no pay? Illinois is in an anarchy race with NY and California. Time will tell. Let us pray that not many are hurt, but I believe more than some will die.

  6. Let us pray that not many are hurt, but I believe more than some will die.

    I hope and believe that is overly pessimistic, SgtPete, but I think you are right that some of us may soon find ourselves in the middle of an unprecedented sociological experiment, namely, “How will middle class Americans react when the wheels come off the political system?”

    The example of 9/11 gives hope on the community, interpersonal level, but I’m worried about what will happen when the politicians try to regroup. Paul’s concern about “opportunistic infections” is well taken.

  7. Jerry Brown has been making noises about cutting spending severely but I’ll believe that when we see him cut union salaries and pensions, Maybe he will do it. Brown is a strange guy,

  8. The EU constitution aka Treaty of Lisbon forbade the ECB from bailing out the debt of the EU’s porvinces (members). Not that they ever allowed legal or moral niceties to interfere with what their ruling class thought expedient. I just hope that when this disgustingly corrupt entity dies it does so without too much bloodshed.
    The only good sources on the EU I know of are:



    Forget about anything in the press-they don’t do EU any better than the rest of the news.

  9. The other part is that the rate that the new Portugal debt is yielding is near 7%. That means that prior bond holders basically fronted Portugal money at rates far below what their current debt is requiring to clear in the marketplace. Even though this bond issue went through the interest rate levels are unsustainable given that their country is already sitting on a mountain of debt, the currency can’t be devalued since they are part of the Euro, and they have little growth or competitive industries. Gulp.

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