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Sovereign Debt solvency crisis is now

Sovereign Debt … no grace period for 2011 … this is front-and-center, now.
Portugal’s 10-yr cracked 7+% … if no eurobond solution soon, this should blow wide open, panic selling, collateral mark-downs … contagion writ large.
This has the potential to get really really interesting really really fast. Bloomberg headline says Germans need to boost rescue fund … is that all they have left?

from Bill Buckler’s The Privateer,

The Perspective Is Grotesque:
Eleven months ago, the US Congress completed a “two stage” operation which raised the Treasury’s debt
ceiling by $US 2.2 TRILLION. Now, they are expected to do it again. While European nations are being
pilloried despite budget cuts of a depth that the US Congress has not even contemplated, let alone
implemented, the US airily retains its AAA sovereign debt rating while Treasury officials blandly point
out that China and Japan have not voiced any concerns about US debt. They go even further. Having
noticed the surge in longer-term US interest rates over the two months since the Fed announced QE2,
these same Treasury officials are claiming that this is a sign of the US economy “gaining strength”.

On the first trading day of 2011, the Fed bought 46 percent of the Treasury debt on offer, up sharply from
the average 34 percent over the second half of December.
Demand is falling just as supply is set to soar.


Wolfgang Manchau, FT 10 JAN — No Happy New Year for the Eurozone

The most glaring manifestation of this lack of leadership is the EU policy consensus that this crisis will eventually be self-correcting, and that a robust liquidity backstop is all that is needed. This is a tragic error. What makes this crisis self-sustaining is the presence of two interacting components: a combined private and public sector solvency crisis, and a competitiveness crisis. To address a lack of competitiveness, southern Europe, including Italy, would need outright deflation. In some cases wages and prices would need to drop by 30 per cent to fall in line with northern eurozone levels. Yet deflation would increase the real value of debt. It may just be conceivable that the periphery will get on top of their competitiveness problem, or on top of the debt problem, but surely not on top of both at the same time, without devaluation or default.

The competitiveness problem may not be the more urgent of the two, but possibly the more important. Internal imbalances are still widening. So is the competitiveness gap. Spain in depression still generates higher inflation than Germany in a boom. December inflation rates were 2.9 per cent in Spain, and 1.7 per cent in Germany.

The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be. In my view, the crisis is insoluble without a Europeanisation of the banking sector, common labour and product market rules that prevent inflation stickiness in southern Europe, and a minimal fiscal union with a single European bond. This is not a complete list.

Europe’s political establishment is of the opinion that such a radical response is unwarranted and politically infeasible. The first assessment is wrong. As the world comes out of its Christmas stupor, it discovers the second may well be right.

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