Wednesday, March 24, 2010

Bill Gross' Take on Portugal's Downgrade and Escaping the Sovereign Debt Trap

Ever wonder what the hell takes the rating agencies so long?

Today, leading credit agency Fitch downgraded Portugal's debt amid "growing concerns about the government's ability to service it's borrowings."

Well - duh - increased borrowings coupled with decreasing tax revenues should raise concerns. What amazes me is that the Euro traded down today on the news - this shouldn't have been news at all, everybody saw this coming from Portugal as soon as Greece got the hiccups.

If the tax revenues were coming back, there might be hope - but revenues are not coming back anytime soon, so hope is bleak, if not non-existent. Europe is an economic basketcase with declining demographics - it's completely toast.

Bond king Bill Gross of Pimco weighed in today - in his eyes, there are three factors which could, at least theoretically, allow a country to escape the sovereign debt trap:
  • It must be able to print its own widely accepted currency
  • Have manageable budget deficits, and
  • Find investors willing to buy their bonds (Source: Forbes)
The US, for now at least, passes all 3 tests...Greece, Portugal, and the rest of the PIGS obviously do not. Much of the rest of the world does not either.

Is sovereign debt the next domino to tumble in the global financial crisis? It sure looks like things are teetering.

To put it in perspective how bad things are when the US looks good in comparison, check out Bud Conrad's excellent analysis about America's federal deficit (Hint: it's even worse than you think!)

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