Tuesday, July 3, 2012

Sovereign Shorts

Aleph Blog:

What applies to companies also applies to nations. During a debt crisis or a currency crisis, there will be an appeal against speculators that are shorting the debt. Well, guess what, for every unit of debt shorted, there is another party buying the debt. This applies to credit default swaps as well – on the other side of the trade there is a guy saying, “What a nice yield.”

The politicians complain, but they could fight back: they could buy in their debts and squeeze the shorts. What’s that, you say? If they did that, they would either have to raise taxes or cut programs? And that is anathema? Well, then the shorts aren’t to blame. The government is to blame; it has made its own bed, let them sleep in it.


WSM said...

"What applies to companies also applies to nations."

Strongly disagree with these sentiments. For some countries (those that are currency issuers, not users) will never have a cash flow/solvency issue.

Which is to say, it is not the budget/deficit management that has any significance whatsoever; rather, it is a function of the currency structure and of productive efficiency within the domestic economy.

So, no, companies are NOT just like nations - not at all.

I enjoy reading the Aleph blog, because the author's thoughts usually spark good discussion. I usually disagree with the conclusions the author draws based on the evidence presented - but nonetheless it's usually a good discussion starter. Unfortunately, the author has blocked me from the comment section. I guess the author is less tolerant than I am of anyone disagreeing with one's own conclusions.

CP said...

OK, finish this sentence from the perspective of the Treasury Minister of one of the PIIGS countries,

"Our debt yields are undeservedly high - however we can't just buy back our debt at a discount because ________."

Did you come up with something besides "we are already spending far beyond our means"?

WSM said...

This is my point exactly.

The Finance Minister's answer is "...because we made the decision to join a fatally flawed currency structure when we signed the Maastricht Treaty."

By joining such a currency structure, the country loses all flexibility, resulting in that country being subject to similar constraints as those of a company.