Rev. Ike and Sovereign Debt
Mar 1, 2010
Posted by Jody Eisenman | Filed under Uncategorized
The late Reverend Ike was a minister with a church in New York City. With a radio show that reached an audience of millions, he preached not that money was the root of evil, but rather, it was the lack of it. Meanwhile, good old Ike lived in luxurious homes and drove exotic cars. There is a story about him that goes like this:
One day after Sunday services, a man came to him and told him that he had a big problem. Rev. Ike shrugged it off, telling him that the Lord would solve it for him. However, the man persisted, so Ike asked him to explain the nature of his discomfort. The man explained that he had a big loan coming die the following morning, and he had no means to pay any of the interest, let alone the principal. Rev. Ike didn’t miss a beat. He said, “My son, you don’t have a problem. The BANK has the problem!”
Similarly, if Greece were to default, the real losers will be the debt holders. The biggest holders are banks in France, Switzerland and Germany. What seems to be happening now is the classic death spiral that occurred many times in 2008. As the debt situation worsened, the cost of insuring this debt via Credit Default Swaps (CDS) skyrockets. This in turn leads to a further drop in Greek bond prices as investors dump them, which then leads to even higher CDS prices. And the circle continues, until either a bailout happens, or the country defaults. These is some fear that in the case of default, this could spread to other European countries. Most of the European Union has extremely high debt to GDP ratios, which means the same thing could happen to them. For that matter, so does the United States. While I don’t think the US is anywhere near default, the major losers would be countries that hold lots of treasuries, like Japan and China. Could this be the reason that China was started to cut back on treasury holdings? A further declinein holdings, along with a rise in interest rates, could really hurt the US debt situation.
Meanwhile, the financial markets seem to shrug this off. The stock market seems to be churning in a rather tight range. For the month of February, the Dow and the S and P closed slightly above their January numbers, and we are roughly even for the year. The resolution of the Greek situation, one way or another, could have a big effect on the markets in March.
