Stop Blaming Investors & Hedge Funds

avatar By: IS
Date posted: 06.19.2012 (5:00 am) | Write a Comment  (0 Comments)

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I always find it very interesting, almost fascinating when countries start complaining about governments causing their economies to fail. When you look at some European leaders that blame their issues on short sellers and on funds that speculate on their bonds and stocks, I find it a bit extreme and vastly incorrect.
Any company or government has the choice of using debt markets to finance their activities and in reality most if not all of them do. There is a huge difference between companies that end up taking debt simply to reduce their cost of capital and those that gradually become desperate. Most of EU countries have VERY generous social programs. If you offer early and generous retirement and unemployment programs, subsidised education, free health care, have a population that pays little taxes and very little productivity, you would likely start running deficits at some point. Over time, the debt level becomes more important which leads to one critical thing.

Depending On The Debt Markets

A company such as Google has issued bonds in the past but it is on the other extreme as it could buy them back and not issue any more for decades. A country like Greece or Spain has too much debt to even consider that. They depend on debt markets not only to run their yearly deficits (with no end in sight) but also roll over the current debt. At some point, investors start to worry about the weight of debt and once that starts to set in, rates can start jumping. I’ve heard many say that the US should not worry about its debt level because it pays almost no interest.That is insane. Rates might increase over time. But they could also jump very quickly. Just a few years ago, Spain and Italy had almost no one worried about their bonds. In recent years, the level of panic has jumped and yields have increased sharply. That means billions more in interest charges which puts even more pressure on the government. Starting to reduce deficits when that cycle starts is very very difficult.

Why Put Yourself In Such A Situation?

I don’t think it’s right to blame investors that suddenly do not want to buy Spanish bonds. I sure would stay far away from them. Even if you did blame them, what are you going to do? Force them to buy? Have someone (EU, Germany, etc) bail you out? All of those usually lead to very difficult conditions. Compare that to some other countries in Scandinavia or Canada that have been able to balance their budget. Sure, it would turn out badly if their yields rose quickly but they would have much more time to react.
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