{"id":1035,"date":"2011-07-20T13:14:06","date_gmt":"2011-07-20T11:14:06","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=1035"},"modified":"2011-07-20T13:14:06","modified_gmt":"2011-07-20T11:14:06","slug":"la-deuda-europea-es-mas-deuda-que-las-otras","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/la-deuda-europea-es-mas-deuda-que-las-otras\/","title":{"rendered":"European debt is more debt than others"},"content":{"rendered":"<p style=\"text-align: justify;\"><img decoding=\"async\" style=\"float: left;\" src=\"http:\/\/api.ning.com\/files\/h3vj2o1f5v9lmoaAXVwyGbe9L7-ZAMi-FxIFpBQvbN0FSIOSNw4AYOTWz5CDql1mXAmI0LTYFby0921VebWia0tCoKyV3y7t\/findingnemo21.jpg?crop=1%3A1&#038;width=171\" alt=\"\" width=\"158\" height=\"141\" \/>Haven\u2019t you ever wondered why sovereign debt in the European periphery is under greater strain and why its risk premium is rising faster than that of countries that are just as indebted \u2013 or even more so \u2013 such as Japan or the US? Why is there so much speculation surrounding the sovereign debt of the PIIGS? Why are these PIIGS economies hurtling towards default or inevitable restructuring, whilst other heavily indebted countries manage to keep the risk premium demanded by the markets at bay?<\/p>\n<p><!--more-->\n<\/p>\n<p style=\"text-align: justify;\">It is not a question of speculative sharks discriminating against certain countries on the basis of nationality, patriotism or anything of the sort. We shall never see the predators of Mr Market sparing anyone\u2019s life simply because their flag, culture, politics or language are more to their liking. The blood of all their prey is exactly the same shade of red and has the same irresistible taste, and as soon as they catch a whiff of it, the outcome is inevitable. This is a universal law of the markets which, for once and without setting a precedent, coincides with the laws of nature. Therefore, if the markets are particularly voracious when it comes to insolvencies on the European periphery, we must look to ourselves for the cause and not fall into the childish and reckless error of: \u00ab<em>The teacher has it in for me<\/em>\u00ab.<\/p>\n<p style=\"text-align: justify;\">To undertake the self-reflection that will enable us to identify our weaknesses \u2013 and thus our responsibility for the treatment we receive from the markets \u2013 we must reflect on a self-evident truth that we seem to have forgotten of late. Investors or fixed-income holders must assess and accept various potential risks when purchasing a bond (although, depending on the complexity of the issue, the variables naturally multiply), including, for example:<\/p>\n<ul style=\"text-align: justify;\">\n<li>Currency risk. Where the issue is denominated in a currency other than the investor\u2019s reference currency.<\/li>\n<li>Counterparty risk. In other words, the likelihood that, at maturity, the issuer will be unable to repay the principal and interest.<\/li>\n<li>Liquidity risk. In the event that we wish to sell our position to a third party before maturity.<\/li>\n<li>Risk of rising interest rates: should the maturity be sufficiently long and interest rates rise, this would reduce the value of our issue.<\/li>\n<li>Inflation risk. Simply because inflation is rising \u2013 even without an official rate rise having taken place \u2013 the market may penalise the value of the issue in anticipation of a rate rise.<\/li>\n<li>Risk of fluctuations in market value. Where, despite the issuer\u2019s creditworthiness, various factors affecting supply and demand cause the price to fall below the price we paid at the time of sale, should the sale take place before maturity.<\/li>\n<\/ul>\n<p style=\"text-align: justify;\">That said, sovereign debt has traditionally been regarded as the lowest-risk form of debt, and we can reduce the risk even further by limiting ourselves to sovereign debt denominated in our reference currency and with short maturities, in order to minimise the effects of yield curves (this is where many treasury departments place their <a href=\"http:\/\/es.wikipedia.org\/wiki\/Instituci%C3%B3n_de_inversi%C3%B3n_colectiva\" target=\"_blank\" rel=\"noopener\">IICs<\/a> and other liquidity in search of \u00abrisk-free\u00bb assets). Since time immemorial, we have regarded an investment in sovereign debt as successful when, upon maturity, the issuer redeems the little piece of paper it gave us in exchange for our money, returning the same amount plus the agreed interest. <strong>The obvious fact is that, at the end of the day, we are simply exchanging one little piece of paper (a bond, bill, promissory note, etc.) issued by the government for another little piece of paper (a banknote) also issued by the government. <\/strong>The key factor that makes this investment less prone to default \u2013 alongside basic solvency \u2013 is that the issuer of the debt is also the issuer of the currency. Because if, at maturity, the issuer lacks sufficient liquidity, the debt market turns its back on it for refinancing or is as insolvent as Madoff himself, the issuer will simply need to print more banknotes to meet its obligations to creditors. That is the <em>safety<\/em> the addition of sovereign fixed-income securities. <strong>From that point onwards, the main risk for investors is no longer counterparty risk but currency risk<\/strong>, since the abuse of such situations logically leads to a deterioration of the country\u2019s currency, hyperinflation, devaluation, mistrust and the resulting vicious circle, as we have seen in countries of the so-called Second and Third Worlds. But in times of stress, the search for a safe haven or the <em>flight to quality<\/em> always selects the direction of the transmitter with the capability to <strong>to manufacture<\/strong> the money to be repaid in the event of insolvency and\/or unforeseen illiquidity.<\/p>\n<p style=\"text-align: justify;\"><img fetchpriority=\"high\" decoding=\"async\" style=\"float: left;\" src=\"http:\/\/www.ecb.int\/ecb\/10ann\/pictures\/shared\/img\/1999\/1999_004.jpg\" alt=\"\" width=\"371\" height=\"371\" \/>We were saying that this was self-evident, since the roles of issuer of sovereign debt (the Treasury) and issuer of currency (the central bank) almost always fall to the same entity: the State, which thus becomes the very embodiment of security, whilst acting as both judge and party\u2026 But perhaps the fact that this has traditionally always been the case has led many to forget that things do not work that way in the European Union. Here, issuing states do not have the ability to print money on demand in the event of illiquidity or insolvency \u2013 no. Here in the Eurozone, we\u2019ve been a bit too cocky; we\u2019ve effectively cut off our own ability to decide our own monetary policy and dismantled the money-printing press. We\u2019ve sacrificed ourselves by leaping into the void and trusting that the massive debt carried by EU countries will be refinanced on time, to infinity and beyond, by Mr Market. Unsecured, without guaranteeing creditors repayment via the printing of banknotes, trusting that <strong>to be, and above all to appear to be <\/strong>strong economies and never to lose their confidence. And indeed, that is how things have been during the boom years. But the market has <em>that nasty habit<\/em> to take careful account of the creditworthiness of the issuers of the little debt notes they want to exchange for his money. The worst thing is that Mr Market has come across issuing states within the Eurozone that are not only the very embodiment of insolvency but, moreover,<strong> Owing to the diversity of their governing bodies and sovereign status, they do not \u2013 and will not, when the time comes \u2013 possess the much-missed ability to create liquidity in order to repay the money in the event of a crisis<\/strong>. S<strong>If they do not emerge from the recession, manage to achieve strong growth and\/or regain the ability to create liquidity, the sovereign debt of those countries becomes debt with a high \u2013 or extremely high \u2013 counterparty risk.<\/strong><\/p>\n<p style=\"text-align: justify;\">Precisely because of this dual handicap \u2013 insolvency and an inability to create money \u2013 the sovereign debt of peripheral countries must be regarded as less \u2018sovereign\u2019 than that of other countries with their own monetary policy and ability to create money. In fact, this is how the market has been pricing it. In a sense <strong>It is as if this were any other corporate debt, where the issuer\u2019s creditworthiness and the expected performance of its accounts are the sole and exclusive means of guaranteeing a successful outcome for the investor<\/strong>. It is this inability to issue currency that explains why countries with similar levels of debt and economic outlooks command such widely varying risk premiums (Japan, the US,. <a href=\"http:\/\/www.expansion.com\/2011\/07\/19\/opinion\/1311106585.html\" target=\"_blank\" rel=\"noopener\">or the resilience of the United Kingdom itself<\/a> vs Italy or Spain). And above all, <strong>the reason why their economies are hurtling ever faster towards the abyss<\/strong>. Let\u2019s stop thinking that they\u2019ve got it in for us, that the rating agencies favour the Stars and Stripes, or that there\u2019s a plot against a Europe that would jeopardise US financial hegemony (sic). Mr Market treats us as we deserve \u2013 as insolvent and incapable of printing money. Because the window-dressing, the politically correct rhetoric, the half-truths, the corruption, the evasions, the black economy, the euphemisms, the roadshows, rigged stress tests, accounting overvaluations, concealed defaults, falsified unemployment figures, etc., etc., etc., do nothing but erode Mr Market\u2019s confidence in us. And without him, no state can survive with the current level of debt in the developed world.<\/p>\n<p style=\"text-align: justify;\"><img decoding=\"async\" style=\"float: left;\" src=\"http:\/\/www.circleplayers.net\/Show%20Pages\/0809\/titanic\/images\/London-Herald-Titanic-Sinks-101070-748588.jpg\" alt=\"\" width=\"249\" height=\"332\" \/>The situation facing these outlying states is so dire that the<a href=\"http:\/\/www.expansion.com\/2011\/07\/19\/empresas\/banca\/1311073361.html\" target=\"_blank\" rel=\"noopener\"> 12-month treasury bills now pay more than a bank deposit<\/a> at the same maturity date. What sort of world are we living in? Do we really need further proof of the insolvency of a state that lacks the material capacity to redeem its sovereign bonds at maturity with paper money that it cannot even print on an ad hoc basis? And to make matters worse \u2013 and add to the surrealism of it all \u2013 it turns out that it is the state itself which, by means of a decree, is prohibiting banks from offering higher interest rates, thereby ensuring it leaves behind its competitors (Spanish banks) who also need to attract money from unsuspecting investors. <em>Raise crows and they\u2019ll peck your eyes out<\/em>, some of the bankers who have been buying up sovereign debt by the bucketful to secure themselves a place on the same ship as Big Brother must be thinking: the Titanic, of course. And now, under the pretext of <em>put a stop to the \u2018liability war\u2019 to prevent a further collapse of the banks\u2019 accounts<\/em>, financial institutions are left looking rather foolish when they see their customers preferring to buy 12-month Treasury Bills at 3.7% rather than depositing their money in a bank fixed-term deposit offering a lower interest rate.<\/p>\n<p style=\"text-align: justify;\">But it is not all surrealism; there are also flashes of lucidity that offer solutions. Painful and traumatic, perhaps, but ultimately medium- and long-term solutions. Because there are none in the short term. The sad thing is that these proposals do not come from European leaders, nor even from non-European leaders, but from the<a href=\"http:\/\/www.eleconomista.es\/flash\/noticias\/3241570\/07\/11\/Pimco-Habria-que-permitir-que-Grecia-Irlanda-y-Portugal-hiciesen-default.html\" target=\"_blank\" rel=\"noopener\"> the private sector on the other side of the Atlantic<\/a>:<\/p>\n<p style=\"padding-left: 30px; text-align: justify;\"><em>Pimco senior executive Neel Kashkari has today called on CNBC for not only Greece, but also Portugal and Ireland, to be allowed to default. Only in this way will it be possible to finalise a plan that demonstrates to the market once and for all \u00abthat the fire in Europe is being put out\u00bb.<\/em><\/p>\n<p style=\"padding-left: 30px; text-align: justify;\"><em>Kashkari\u2019s plan would require coordination amongst the governments of the Eurozone, which, in his view, \u00abis easier said than done\u00bb. It would have to protect the other Eurozone countries and \u00abbe attractive to German taxpayers\u00bb, helping them to foot the bill.<\/em><\/p>\n<p style=\"padding-left: 30px; text-align: justify;\"><em>\u00abImagine if Germany, France, the ECB and the IMF were to announce a new bailout fund of 1 trillion or more, and declare that it is available to all eurozone countries except Greece, Ireland and Portugal,\u00bb says Kashkari. <\/em><\/p>\n<p style=\"padding-left: 30px; text-align: justify;\"><em>\u00abThey would be putting all their capital on the line and creating a  firewall to protect Spain and Italy, whilst for Greece,  Ireland and Portugal, debt restructuring would be considered.\u00bb In his  view, \u00abthat would be easier to ask of German taxpayers  than asking them to continue financing Greece.\u00bb.<\/em><\/p>\n<p style=\"text-align: justify;\">We concluded the previous article with the following sentence: \u00ab<em>The interconnection is spooky, it's summer, the temperature is rising and we have no firewalls. What a stress...<\/em>\u00bbWell then, we should put the firewall in place now, even if it means allowing three EU Member States to default, which would trigger a massive financial tsunami. And the sad reality is that at tomorrow\u2019s meeting between Merkel, Sarkozy (who are having dinner alone tonight in a far from romantic setting, following a prelude blessed by Obama) and the rest of the entourage, the only aim will be to achieve a \u00abnon-significant step forward\u00bb towards yet another instalment in the bailout of Greece\u2019s bottomless pit. Meanwhile, the five experts on the German government\u2019s economic advisory council are calling for solutions that do not involve the creation of a Eurobond, but they are also calling for an end to the policy of pinning hopes on an economic recovery in Portugal, Ireland and Greece, as this would plunge the Eurozone into crisis within a few quarters.<\/p>\n<p style=\"text-align: justify;\">If the Eurobond or an orderly break-up of the Eurozone do not materialise soon, the drastic measures needed to save our lives will cripple us for decades.<\/p>\n<p style=\"text-align: justify;\">Via: <a href=\"http:\/\/www.creditwritedowns.com\/\" target=\"_blank\" rel=\"noopener\">creditwritedowns.com<\/a> \u2013 Edward Harrison <a href=\"http:\/\/twitter.com\/#!\/edwardnh\" target=\"_blank\" rel=\"noopener\">@edwardnh<\/a><\/p>","protected":false},"excerpt":{"rendered":"<p>\u00bfNunca os hab\u00e9is preguntado por qu\u00e9 la deuda soberana de la periferia europea se tensiona m\u00e1s y su prima de riesgo crece con mayor rapidez que la de pa\u00edses tanto o m\u00e1s endeudados como Jap\u00f3n o EE.UU.? \u00bfPor qu\u00e9 motivo se especula tanto sobre la deuda soberana de los PIIGS? \u00bfCu\u00e1l es la raz\u00f3n por [&hellip;]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[45,41,39,40,52,37,48],"tags":[],"class_list":["post-1035","post","type-post","status-publish","format-standard","hentry","category-asesoramiento-deportistas-artistas","category-economia-y-finanzas","category-crear-mi-propio-family-offices","category-gestion-financiera","category-asesoramiento-patrimonial-multi-family-office","category-reflexion","category-asesoramiento-patrimonial-multi-family-office-crear-mi-propio-family-offices"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1035","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=1035"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1035\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=1035"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=1035"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=1035"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}