LIFE AFTER DEBT: Monday's equity slump was widely attributed to Standard Poor's decision to downgrade its outlook for US debt for the first time in 70 years. In reality, market reaction was a sanguine one.
The dollar rose against the euro, pound and yen. US government bond yields declined. The volatility index initially spiked before quickly falling back to levels seen in preceding days. Credit default swaps that measure the risk of default rose but remain on a par with Germany.
Why? For one, SP is not the first to note the US’s fiscal situation. Bill Gross, the world’s biggest bond manager, has been increasingly vocal in his warnings of late. Secondly, while SP warns that there is a one-in-three chance of a downgrade within two years, history suggests the number of actual downgrades is “much lower”, Goldman Sachs said.
Third, there was the suspicion that SP, which completely missed the subprime blow-up, was over-compensating.
Finally, and ironically, SP’s move should motivate polarised US politicos to reach agreement on debt measures.
“Once they’ve exhausted all the other alternatives, US politicians can usually be relied on to do the right thing,” as Barclays Capital noted, paraphrasing the famous Winston Churchill quote.
GREECE LIGHTENING:While actual US default remains almost unthinkable, Greek default looks inevitable. With debt approaching 150 per cent of GDP, Greek, German and IMF officials are said to be privately admitting that "restructuring" is a case of when, not if. Markets certainly think so, with two-year Greek bonds yielding 20 per cent and credit default swaps at record levels.
Bank for International Settlements data indicate that European banks have $154 billion in exposure to Greece, with the French ($59 billion) and Germans ($40 billion) most exposed.
Most economists estimate that Greece needs roughly half of this debt to be written off, while European banks face further losses in the event of a haircut to Irish and Portuguese debt.
SHRUGGED OFF: The film version of Ayn Rand's cult novel Atlas Shrugged has just been released in the US. Rand's absolutist celebration of self-interest, hatred of charity and utopian faith in free markets tends not to impress European readers (the awful prose doesn't help), but she enjoys a devoted following stateside, particularly among chief executives, entrepreneurs and economic ideologues.
One such individual passionately defended the novel following its publication in 1957.
“Creative individuals and undeviating purpose and rationality achieve joy and fulfilment”, he wrote. “Parasites who persistently avoid either purpose or reason perish as they should.” The writer? One Alan Greenspan.
