The extra yield investors demand to hold Greek 10-year government bonds instead of German bunds, Europe's benchmark government securities, surged to a euro-era record of 973 basis points on May 7, and was at 953 basis points today. It started the year at 239 basis points. The difference in yield, or spread, between German bonds and 10-year debt from Ireland, Portugal, Spain and Italy also reached euro-era records.

Sovereign Debt Spread to Germany
Country	Jan 01	May 07	Dec 30
Belgium	0.3%	0.7%	1.0%
France	0.2%	0.4%	0.4%
Greece	2.4%	9.7%	9.5%
Ireland	1.4%	3.1%	6.0%
Italy	0.3%	1.5%	1.8%
Portugal	0.7%	3.5%	3.6%
Spain	0.6%	1.6%	2.5%

 

 

 

The more we cling to our deranged dependence on:

1- systemic fraud,

2- exponential expansion of credit,

3- corporate cartels/political Plutocracy,

4- Central State largesse,

5- corporate-media propaganda and

6- a financial system that breathes misrepresentation of risk,

.... the stronger the Monster becomes.

Fed chairman Bernanke, Treasury Secretary Geitner, President Obama and Congress are all ordering the band to play spritely tunes of rising holiday spending, endless borrowing, and the carefully crafted propaganda of Fed manipulation, statistical legerdemain and happy-talk about how the Monster will be gone when we open our eyes.

If we insist--childlike, petulant, resentful of reality--on keeping our eyes closed in 2011, then we are dooming ourselves to facing a much fiercer and more powerful Monster in 2012. We can't escape the confrontation, and the longer we put it off, hiding under our bed, wishing it all away, the more likely our panicky collapse when reality forces our eyes open.

The euro zone needs to, and eventually will, take three steps:

Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other’s debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.

But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her “un-European.”

Step 2: For the core countries, the European Central Bank will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary. The wild card is whether the Bundesbank president, Axel Weber, will get to take over the central bank in fall 2011 – as expected and as apparently required by Ms. Merkel.

Mr. Weber has been vociferously opposed to exactly this bond-buying course of action. So the immovable Mr. Weber will meet the unstoppable logic of economic events. Good luck, Mr. Weber.

Step 3: One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?

The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened.

The unfortunate truth is that despite its supposed return to pre-eminence and the renewed swagger of its senior officials, the I.M.F. remains weak and of limited value. It is an effective lender to small European countries under intense pressure — Latvia, Iceland, Greece and so on. But the I.M.F. does not have the resources or the legitimacy to save the bigger countries.

Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses – willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that. Will no one think hard about what this means for our budget and our political system until it is too late? .

The very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

This is what the political scientists Jacob Hacker and Paul Pierson call the "winner-take-all economy." It is not a picture of a healthy society.

Such a level of economic inequality, not seen in the United States since the eve of the Great Depression, bespeaks a political economy in which the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class.

Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan.

It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.

The dramatic growth of inequality, then, is the result not of the "natural" workings of the market but of four decades' worth of deliberate political choices. Hacker and Pierson amass a great deal of evidence for this proposition, which leads them to the crux of their argument: that not just the U.S. economy but also the entire U.S. political system has devolved into a winner-take-all sport. They portray American politics not as a democratic game of majority rule but rather as a field of "organized combat" -- a struggle to the death among competing organized groups seeking to influence the policymaking process. Moreover, they suggest, business and the wealthy have all but vanquished the middle class and have thus been able to dominate policymaking for the better part of 40 years with little opposition.

The task of restoring some sense of proportion and balance to the winner-take-all political economy is essential if the American body politic is to recover from its current diseased condition.

Metrics to assess indebtedness of nations are classified as solvency and liquidity measures.

SOLVENCY

 

The defining element in determining the risk of debt is the issuer’s solvency – its ability to pay what it owes. The widest definition of government liabilities (owes) – gross public debt – captures all principal and interest payments due. As is true of all metrics, the gross public debt ratio (debt to GDP) provides only a partial indicator of sovereign solvency – a crude indicator of long-term national solvency. However, it does not consider debt relative to actual government revenues (the capacity to repay), or the amount and quality of public assets (the capacity to offset debt). Net public debt is gross public debt minus the assets held by the government (calculations differ slightly from government to government). The assets can include debt securities (national, regional or provincial) held by the government, other agency bonds, and cash, but do not account for non-financial assets.

External debt is particularly important when assessing the debt stocks in Latin America, Africa and other emerging economies where a history of poor credibility precluded countries from issuing international debt in their home currency. As countries develop their capital markets they are dependent on borrowing from outside sources, and currency risk becomes one of the most important factors weighing on overall external debt ratios.

While euro-denominated Euro-zone debts were once assumed to be free of currency risk within the ‘zone, it is dawning on investors that risks vary significantly across the Euro-zone. German debt and Greek debt, while issued in the same currency and from the same economic bloc, each possess distinct risk factors. Complicating the Euro-zone situation is very significant levels of cross-border holding of sovereign and banking debt by Euro-zone and wider-EU banks. According to the Institute of International Finance (IIF), for most of the sixteen Euro-zone sovereigns, non-domestic investors hold more than 50% of the outstanding government debt. Some 65% of Greek government debt is held by non-residents in the rest of the Euro-zone and, according to Bureau of International Statistics data, the largest creditors to Irish public- and private-sector debt are banks based in the UK and Germany.

LIQUIDITY

While solvency addressed the broader concept of a country’s ability to service its debts, liquidity targets the more immediate cost of funds to retire or roll-over its obligations.