Transfer Station

Peace of mind
It's a piece of cake
Thought control
You get on any time you like
--Talking Heads

Peter Atwater compares current sovereign crises in Europe to the domestic credit crisis that unfolded in 2008. As he notes, the situation in Europe was (is) very predictable--despite EU bureaucrat statements to the contrary.

Sovereign problems are easily forecast because they are a natural extension of governments kicking the can down the road--substituting risk in the private sector for risk in the public sector. Cheap credit motivated many world wide to borrow huge sums and invest those borrowed funds in risky assets--real estate among them.

As highly leveraged institutions worldwide have approached insolvency, governments and their agents (i.e., central banks) have been purchasing those underperforming assets, such as mortgage backed securities, with funds that were either printed or borrowed. Now the collective holds those underperforming assets.

Risk has not been reduced, it has merely been transferred to the public sphere. And because many sovereigns entered this situation with mountains of underfunded social programs, risk in many ways has become elevated.

Now, that risk is coming due. Sovereign situations mirror private sector situations a year or two back. Sovereigns are now the insolvent ones. They need bailouts. But who is in a position to bail out the sovereigns?

Over the past couple of months, the consensus seemed to be that Germany, France, and the United States would be willing and able. None of these countries, however, is in strong financial condition itself. They may be willing, but they are not able.

It seems like the bond market is figuring as much, as credit spreads in the first countries to hit the breadline continue to widen.

Other markets currently seem to be turning a blind eye to the $ multi-trillion question: where, or upon whom, can the risk be transferred to next?

position in TLT