The Great Debate UK
–Laurence Copeland is a professor of finance at Cardiff University Business School . The opinions expressed are his own–
The title says it all: “This Time is Different” by Reinhart and Rogoff tells how, for centuries, monarchs and, later, nation states have persuaded lenders to forget their chequered credit record and trust them yet again with loans on relatively easy terms. Although, by the nineteenth century, Western European countries had mostly reached a stage where their reputation seemed worth preserving at some cost, more or less from the moment they achieved their independence the South American countries established a tradition of default which they have guarded jealously to the present day, and as Reinhart and Rogoff make clear, Greece has defaulted at regular intervals ever since it became an independent nation in 1832.
Yet the tale they tell flies in the face of common sense, as well as running counter to the faith in the rationality of capital markets which used to be widespread but is now confined to a diminishing band of true believers. After all, with such spotty credit records, you would expect sovereign borrowers to be able to raise loans only by paying prohibitively high interest rates. Yet however much attention they may pay to credit history in their consumer lending division, when it comes to sovereign borrowers, bankers seem to believe with Henry Ford that history is bunk, or as the CEO of the world’s then-biggest bank put it in the 1970’s: “Countries don’t go bust”.
Sure enough, this year, lenders have finally come to their senses with respect to the euro zone countries, but not before our bankers – yes, the ones whose skills are as rare as those of a Lionel Messi and need to be rewarded accordingly – had lent them vast sums at interest rates that took no account whatever of their respective creditworthiness, and indeed they are still doing the same with their lending to Britain and America.
The assault on the Irish bond market by bond investors has continued with a vengeance this week with 10-year bond yields hovering close to nine percent at 8.91 percent. Since August yields have been trending higher, but they accelerated sharply in mid-October, when they were at six percent. At this rate, yields could be in double figures by next week.
from The Great Debate:
Come good news or bad, the U.S. treasury market is taking a sell now and wait for inflation later strategy.
Since May 21, Treasuries have been battered, sending the yield on 10-year bonds up by nearly 40 basis points to 3.53 percent, an enormous move in bond market terms.
from The Great Debate:
The most revealing verdict on the results of the U.S. banking stress test was delivered not by shareholders but by the vigilantes of the bond market, who shunned an auction of 30-year government debt.
This makes sense: if the U.S. is letting banks off too lightly it will be taxpayers and the people who lend the U.S. money who will have to pick up the bill.