European Sovereign Debt Crisis Set to Spread … Government Bonds at Risk!

Damn if they bailout, damn if they don't! France and Germany are in deep deep trouble!

• Although, the financial MSM is making alot of noise about the crappy situation the Eurozone is in, America is in an even worse state. All the ‘news’ reports about the problems in the EU has allowed the USD to strengthen. The belief that the USD will not collapse will be tested in 2011. All the major currencies are essentially toast: USD, EUD, JPY, UKP…the minor fiat currencies will not survive the coming global currency crisis!
   
  European Sovereign Debt Crisis Set to Spread … Government Bonds at Risk!
  …. 
  Foreign Exposure to PIGS Debt
  Is a Major Threat
  The BIS’s latest quarterly review contains a tabulation of exposure, broken down by nationality, to debt of the four most problematic countries: Portugal, Ireland, Greece, and Spain. The grand total: A staggering $2.2 trillion! Nearly one quarter — $513 billion — is held by German investors. U.S. investors are on the hook for $353 billion and U.K. investors for $370 billion. These are humongous numbers.
   
  Conservatively speaking, these debts will need at least a 30 percent haircut for the PIGS to have a realistic opportunity of getting out of the hole they’re in. And if that 30 percent is the result of defaults, the international banking system would again be severely wounded.
   
  That’s why I called the Greek bailout earlier this year another banking system bailout. And that’s why the international community claims bailouts are the best choice. There is always an alternative. But in this case, the political will is obviously lacking. So as analysts and investors we have to accept it as a reality and ask ourselves where this may lead.
   
  The Difference between a Liquidity Crisis
  and a Solvency Crisis
  I have always made the case that the political reaction to the housing and banking crisis of 2007-2009 was not solving, nor addressing, the underlying problem of too much debt. By adding more debt you can buy some time and kick the can. But in doing so the problem only gets bigger, which is what has happened.
   
  Back then we had banks and other corporations on the brink of collapse. Now many countries are in the same boat! To understand what was going wrong then and what is going wrong now you have to distinguish between a liquidity crisis and a solvency crisis …
   
  A liquidity crisis is a temporary inability to pay. The debtor is sound enough to service the debt. In such a case you might have a good reason for a bailout. A solvency crisis is a different story … The debtor does not have the wherewithal to service the debt. Therefore, additional credit can only aggravate the situation — it’s throwing good money after bad.
   
  The Government Debt Crises
  Are Solvency Crises
  The current government debt crises are clearly solvency crises. And many governments will finally have to acknowledge that their debt mountains are too large to service. Bailouts do not improve the situation of these countries. Nor do they help the countries making bailouts. In fact, they too are up to their eyeballs in debt.
    
  That’s true for Germany, that’s true for Japan, that’s true for the U.K., and that’s true for the U.S. The longer these relatively stronger countries finance the weaker ones — either directly or via international organizations like the IMF — the faster they’ll face ruin themselves. At the same time, they’re almost guaranteeing that the sovereign debt crisis will spread like wildfire. What does this mean for you?
   
  Well, scores of government bonds, once considered safe investments, aren’t safe anymore! That’s because investors now realize that many industrial countries will sooner or later have to make a tough choice: Either outright default or surging inflation.

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