01/15/10 Stockholm, Sweden – Throughout the financial crisis we’ve witnessed governments stepping in to backstop and rescue failing corporations with loans and bailouts… now imagine the reverse. For the first time, judging by the cost of insuring against a debt default, “the market has started to price in a bigger probability of default among industrialised countries than among investment grade companies.”
According to the Financial Times:
“This development reflects the market’s current obsession with sovereign risk. The same thing applies in the bond markets where investors are no longer willing to regard the debt of an increasing number of developed world governments as risk free. These countries have taken on huge private sector debts in their efforts to reverse the economic downturn and bail out the financial sector.
“John Wraith, fixed income strategist at BofA Merrill Lynch Global Research, says: ‘The concept of what is risk free has certainly changed in as much as government bond yields of the UK and other countries are higher than some corporates.’”
In one example, the article points out that the cost to insure UK debt has risen to double that of certain leading companies… so much for being a “risk-free” nation.
Clearly these European countries have much smaller economies than the US, and they also don’t benefit from printing the world’s reserve currency. However, by pursuing similar hazardous strategies, such as racking up mountains of public debt, the US is on track to face similar consequences.
To get a better sense of the details and potential consequences, read the Financial Times’ coverage of the changing perspective on “risk-free” nations.
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
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