As we enter 2012 there is one issue that probably sits at the forefront of our minds: can the overly indebted parts of the financial system keep financing themselves?
The markets opened the year with some optimism after their festive slumber. We feel typecast as the killjoys, but let’s see how long this optimism lasts.
The front page of City AM today proclaims "Euro woes with a vengeance".
Sovereigns and institutions need to issue, or reissue and ‘roll over’ vast sums of debt.
The focus remains on Europe which has nearly €800bn of sovereign debt to sell to the market this year according to the FT. Goldman Sachs thinks it’s more like €1trn.
Mind you, the United States is not much healthier. Why do you think the Fed is so keen to extend unlimited swap lines across the Atlantic?
Within Europe, Italy has nearly €250bn to issue, France €200bn, prudent old Germany has €180bn and Spain around €80bn.
In 2011 these nations managed to finance themselves, even if there was often large participation in their respective debt markets by the European Central Bank (ECB). Essentially not enough external investors from around the world thought it was smart to lend money to the PIIGS et al any more.
Where are the bond vigilantes?
The problem with carrying huge debt loads is that you are fine until you are not. When the interest rate environment is calm you can just about manage, but when the bond markets smell risk and continued irresponsibility they punish you.
A small increase in the rates you have to pay for the privilege of borrowing has an enormous effect on your ability to remain solvent due your monstrous leverage. Leverage and debt levels in the banking system have concerned us for some time.
It wouldn’t take much of a shift in market thinking to produce a buyers’ strike and send rates skywards.
Just look at the changes in Greece’s borrowing costs for two year and ten year bonds.
The bucket carrying ECB could finally be faced with an aggressive print or devastating collapse…
