GOVERNMENTS WILL DEFAULT ON THEIR DEBT-THAT IS THE CURRENT AND FORCAST REALITY-LOSSES TO INVESTORS ARE INEVITABLE

Bond investors holding the bonds of foreign countries are just sitting on a ticking time bomb.Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to a report issued by the well known investment banking firm, Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

It is not unusual for debt burdened countries to just stiff their bond holders when they are unable to pay their debts as they mature. They could care less as the markets are literally anticipating this event, and the buyers of these securities know that full well.

They are playing musical chairs with the debt, buying it when the price dips, selling it when it goes up a fraction, and just trading it daily/weekly at times, with no interest in holding it to maturity.

Thus the marginal countries, are literally at the mercy of daily market action related to buyers interest and sellers desire to exit, rather than actual market fundamentals and long term economic outlook for their economies.

Those countries, and the USA is looking more like them every year, simply can not balance their budgets by making needed cuts in typically social welfare programs that their populations have grown accustomed to as a "right".

Countries that try to cut local expenses or benefits are unable to do as due to protests and riots...what will happen next as the spending above their collections continue...expect more of the same.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.

Double Dip

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009.

Credit-Default Swaps

A report from the Commerce Department today showed U.S. durable goods orders increased 0.3 percent, compared with the 3 percent median estimate of 75 economists surveyed by Bloomberg News, figures showed today in Washington. The number of unemployment claims unexpectedly shot up by 12,000 to 500,000 in the week ended Aug 14, Labor Department figures showed Aug. 19.

Yields on German and U.S. benchmark securities sank today as investors sought the safest assets. U.S. two-year Treasury yields, at a four-month high 1.18 percent on April 5, fell to a record low 0.4542 percent yesterday.

The yield on Greek debt rose to more than 900 basis points above that of Germany today, the most since the European Union and International Monetary Fund created a 750 billion-euro ($948 billion) bailout package in May. Greece’s so-called yield spread over German debt was at 932 basis points as of 2:18 p.m. in London, short of the 973 basis point record set on May 7. The Irish-German yield spread rose to a record 347 basis points, from 318 points yesterday.

Credit-default swaps that insure Irish government bonds against non-payment for five years rose 21 basis points to 331 today, the most since March 2009, according to data provider CMA. Greek swaps jumped to 921.5, the most since June, from 896.

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.

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