Thursday, May 06, 2010

Meanwhile back at the ranch

Last week, according to every tabloid-reading taxi driver on the planet, Greece was in big, big trouble because its government had run up unmanageable debts. It was a nasty situation and any reasonable person could only assume that other, frankly untrustworthy, Euro-Area governments were obviously in the same or similar situations. Stands to reason. The Greek government had circa € 25 billion to issue over the remainder of 2010 and there was great concern, nay panic, about whether or not it would have to pay high yields to do that. So we had a lot of rushing around and urgent meetings between very important people to draw up an emergency loan arrangement so that Greece could get through this 'crisis'. No-one wanted to test the market to see if Greece could find investors for the €8 billion or so of government debt it was scheduled to issue in May because that would be too scary. No-one wanted to go there. Or so we were told.

Meanwhile back on the farm, to precious little fanfare and almost no press, on May 3rd 2010 the U.S. Treasury issued its refunding schedule for the next three months. And it's a doozy. This quarter the U.S. Treasury expects to issue $340 billion in debt, $71 billion higher than announced in February. And in the quarter after this one Treasury expects to issue another $376 billion.

And there is clearly nothing to worry about because the U.S. Treasury market is the place to be if you need a safe haven. The sliding Euro, the scary state of world stock markets, the risk of 'contagion' from those frankly unsound European government bond markets could never impact the United States. Quite the reverse. Obviously the U.S. government bond market is in entirely a different league. Those nasty "U.S.-based" ratings agencies could never downgrade Uncle Sam. We know that because Timothy Geithner told us so. And Timothy Geithner has his eyes on the ball, always.




So we have nothing to worry about. After all U.S. Treasuries are on a roll. As of yesterday yields on 10 year paper were just a tad above 3.5%, which is fair if your government deficit is around 11.2% of annual GDP. Which is a whole lot better than the 13% or so that Greece was running. So no problem there. It's not like the U.S. relies on foreign investors to buy those bonds, so what's the problem?

Except as Niall Ferguson noted in the Financial Times on February 10 of this year: "the Fed is phasing out.... purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year."

Gulp.
Can't we like get Moody's to, er, like just downgrade the whole entire rest-of-the-world, or something? Well it wouldn't hurt to try.

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