Thursday, January 28, 2010

Eurozone Sovereign Risk With The Eyes Of Credit Agricole, And The US Debt Delusion

A short summary of challenges the Eurozone governments are facing available here, but for the lazy reader here is the conclusion:

1. In the short, and most importantly, the long term, Greece is by far the riskiest country: it combines high public debt with a severely degraded initial budgetary position and major demographic concerns.
2. Ireland and Spain are also risky countries in the short and long term. The deterioration in their public finances is rapid but it is taking place in an environment where initial public debt levels are lower.
3. Portugal appears to hold large-scale risks in the short term. In the longer term, age-related risks are lower. However, the structural weaknesses surrounding the Portuguese economy (low
productivity and competitiveness) will continue to adversely affect its public finances over the longer term.
4. Italy is the country with the lowest public-finance related risk, due to its fiscal efforts made in recent years and structural pension reforms.

I was reading Paul Kasriel's, the chief economist at Northern Trust, "Debt Issues" at the beginning of the week, and was disappointed. Of course, Japan is probably the macro trade of this decade, but why Paul is focusing on US press? The problem with US debt is of another sort, not that only Europeans are a joke, but also Americans and the other Paul with full faith in debt delusion?

Christopher Wood, the strategist at CLSA Asia-Pacific Markets, was nailing down the "off-budget tools" of US government last week:

The term “off budget” is obviously used facetiously. The implicit federal government guarantee has become over the past two years ever more explicit which means that Fannie and Freddie obligations should really be counted as part of Federal Government debt with the only difference being that Fannie and Freddie debt is higher yielding. Thus, Fannie and Freddie 30-year bond yields are now yielding 4.9% or 35bps above US Treasuries ... , while the Fannie Mae MBS yield spread over Treasuries is now 71bps. And investors should also note that, if the elephantine monstrosities’ combined outstanding debt of US$1.6tn is included, total US gross public debt rises from 87% of GDP to an estimated 98%. Furthermore, if the US$3.9tn of MBS sold and guaranteed by Fannie and Freddie are included, public debt rises to about 125% of GDP.
European joke?

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