Japan Spirals into Bankruptcy?

Discussion in 'Economics' started by observer67, Nov 4, 2009.

  1. My guess is that when Einhorn or Kyle Bass, among others, are all over the place crowing about their out-of-the-money puts on JGBs, now would be the time to be a seller, not a buyer of these options.
    #11     Nov 6, 2009
  2. m22au


  3. All of these articles, esp the Hayman piece whets my appetite for a 'short JGB etf'.. Anyone know of any trading in the US?

    Better than the 10 year JGB future I'd love to short a 30 year JGB. I'm sure a long maturity ETF could take care of this with ease. I can trade SGX, but honestly i'd be more comfortable rolling over some itm options on a US equity (in keeping my size within respectable boundaries)...
    #13     Nov 6, 2009
  4. Yes they have been on the tightrope for the past 20 years. I read some interesting articles over past few months where people think the tipping point comes soon.

    These are the highlights from what I remember:

    Pension Funds will have to be net sellers of JGBs for first time just to make payments.

    Japans massive debt issuance will have to compete with Uncle Sam's.

    Only good thing Japan has going for their debt situation...is that most of it is held internally.
    #14     Nov 6, 2009
  5. m22au


    #15     Jan 26, 2010
  6. I will post the article here for everybody.

    S&P lowers Japan credit rating outlook

    TOKYO (AP) -- Standard & Poor's lowered its assessment of Japan's fiscal health Tuesday, threatening a credit rating cut if the economy stays weak and debt remains sky high.

    In a surprise move, S&P affirmed the country's "AA" long-term debt rating but revised its outlook to "negative" from "stable."

    "The outlook change reflects our view that the Japanese government's diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures," S&P said in a statement.

    Japan shoulders the biggest public debt burden among industrialized countries and S&P predicts the country's debt will balloon to 115 percent of gross domestic product over the next several years.

    Other developed nations including Britain and the U.S. could also face headwinds for their credit ratings as government debt swells due to massive deficit spending to prop up struggling economies.

    With Japan struggling to sustain a fragile economic recovery, its young government has prioritized economy-boosting spending over fiscal discipline. Lifting the purchasing power of voters has become all the more important amid a slide in Prime Minister Yukio Hatoyama's approval ratings.

    Recent media polls have shown voters growing increasingly disenchanted with the Democrats since they swept into power last summer. A top party official is mired in a fundraising scandal, and Hatoyama was forced to replace his finance minister when Hirohisa Fujii quit earlier this month due to health problem.

    A new stimulus package worth 7.2 trillion yen ($80 billion) in spending passed the lower house Monday and is set for upper house approval later this week. Next on the agenda is a record $1 trillion budget for the next fiscal year starting April, which will require the government to issue some 44.3 trillion yen ($492 billion) in bonds.

    "The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected," S&P said.

    S&P is maintaining Japan's "AA" rating -- its third highest -- for now based on international assets, the yen's status as a reserve currency, the financial system's resilience and the diverse economy. Japan's gold and foreign exchange reserves of more than $1 trillion are second only to China's, it said.

    The credit rating agency said it will be monitoring policy, particularly Japan's medium-term fiscal plan scheduled for release by mid-year.

    Christian Carrillo, senior rates strategist at Societe Generale in Tokyo, suspects Japan's sovereign credit rating might take a hit if the government is forced to issue more than 44.3 trillion yen in bonds, "which might happen in the second half of 2010."
    #16     Jan 26, 2010
  7. zdreg


    original source was http://www.rightsidenews.com/200911057142/politics-and-economics/japan-spirals-into-bankruptcy.html
    #17     Jan 26, 2010
  8. Actually there was a period about 6 years ago where JGBs and Euroyen got hammered for a few months. But yeah, apart from that it's been no dice.

    Still, simple logic says you can't increase your debt load forever. Once the issuance gets big enough to absorb all domestic savings, or the economy starts to experience inflation, bonds will go into a long bear market. It's a bit reminiscent of US bonds from 1929 to 1980. From 1929 to 1942 they had a steady bull run, yields eventually falling to 1.5% in the early 1940s. Everyone expected a bear market then led by war inflation, but yields didn't get that high and in the 1950s they stayed low again. Even after Vietnam and a commodity boom, yields didn't get to 10%+ until the late 70s/1980 under Volcker. Still, anyone who bought bonds in the late 60s or 70s got massacred. Anyone who was shorting in the 30s, 40s, or 50s got killed too. I guess the lesson is that timing is important if you are a speculator.

    In other words, if you want to short an entrenched bull market, you need a catalyst that i) makes sense and ii) the market actually responds to. It's a bit like shorting the dot.com or housing bubbles - overvaluation is not enough, you need the internal fundamentals to start falling apart and the market to start reacting very negatively to this deterioration. When that happens, a long Nikkei/short JGBs spread will probably make a crapload of money.
    #18     Jan 26, 2010
  9. Which...why.....Like Dominoes.....I believe when It starts, It will take most everyone with It....

    Not a single country or economy will be unaffected...

    This has gotten, way too big, and out of hand...
    #19     Jan 26, 2010
  10. Into 2009, governments around the world went into serious deficit mode as taxes fell but spending rose. They also bailed out many banks and took on their debt load. The US's bailout of AIG has cost $180bn so far, and the total bailout cost in Britain is a stunning $1,380bn. In late 2009 and continuing to today, sovereign (government) bond markets are showing some strange signs.

    Some facts doesn't make sense. Japan’s public debt has already risen above 200% of GDP, but the government can borrow for 10 years at 1.4%. In contrast, Australia’s government debt is much lower at about 25% of GDP, but it pays over 5.5%. Other rich countries with varying debt ratios all pay roughly 3.5-4%. Everyone is watching the sickest governments, which include Japan ("a bug in search of a windshield") and the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). Greece is especially important.

    To avoid scaring bond buyers (who buy the government bonds to finance deficits), governments need credible 5-year plans to bring deficits down. They must convince markets of their discipline to get their fiscal houses in order. Germany has done this with a Constitutional amendment forcing a balanced budget by 2015; the US and UK have done nothing. Read about the German's prudent Constitutional Deficit Rule here: IMF on German CD Rule.

    Members of the EU normally must abide by a clause of the Maastricht treaty where deficits remain under 3% of GDP. All the EU governments have collectively ignored this, but some have put measures into place to get back there (Germany, the Netherlands), whereas others have 6-8% deficits that may go on for a long time. This is bad for bonds. Across the eurozone, where countries lack control over their money supply, the risk of default is more real. That is one of the reasons why the Markit SovX index, a basket of sovereign CDS on Europe’s top 15 nations, at 71.5 basis points (bps), is now 14% more expensive than the the index for the region’s top 125 investment-grade companies. To wit: an index of government bonds costs more to insure than an index of corporate bonds - bond investors prefer the full faith and credit of companies over countries! This is shocking - Western governments are supposed to be safer and more stable than companies headquartered inside them, because theoretically they can tax the companies and the populace to pay their debts.

    Greece seems to be the worst offender of the PIIGS. Its total debt is estimated as high as 875% of GDP, compared to rich world normal of 500-600% (this includes all on and off balance sheet debt and an estimate of social spending commitments, according to McKinsey). Greece's outstanding government debt alone is between 120-130% of GDP. The Greek deficits were worse than what the previous Conservative government published of 6%. The Conservatives under Kostas Karamanlis basically lied through the national statistics department. The new, Socialist government under George Papandreou came in on October 2009 and published the correct number of 12% (recently revised up to 13%).

    #20     Jan 27, 2010