PIGIES Are Getting Slaughtered

You must be totally brain dead to be unaware that the U.S. is having severe financial problems. The latest in this respect is today’s news that credit default swaps on U.S. sovereign debt have risen to a new 69.5 bp high. So the cost of insuring yourself against a default of the U.S. government continues to be on the rise.

Maybe this has something to do with the cost of the 30k+ security people required tomorrow for the Obama party inauguration: more troops to protect the new president than currently are turning caves inside out in Afghanistan looking for Bin Laden and company.

Or maybe Colin Powell is putting his money where his mouth is by buying some protection against the “crisis that will come along the 21st of 22nd of January that we don’t even know about right now” as he already predicted on the 19th of October 2008 (2:40 seconds into the clip):

But the U.S. is hardly the only one in trouble. Have a look at our PIGIES over here: Portugal, Italy, Greece, Ireland, England and Spain. Just a few of today’s highlights:

S&P is lowering the credit rating of Spain from AAA to AA+. Outlook Stable. Stable? You got to be joking.

In the mean time, former Irish central bank official David McWilliams was heard saying:

“If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece.”

and

“The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.”

Not that England doesn’t have any problems of its own. Shares of RBS tanked nearly 70% today, taking along several of it peers. As Sam Jones points out (emphasis mine):

Naturally, the UK government is rather keen RBS does not fail. And indeed, it has gone all out. Just about every conceivable measure has now been thrown down to stave off disaster for the UK banking system: recapitalisation, asset guarantees, commercial paper guarantees, liquidity backstops, quantitative and qualitative easing and subversion of Basel II risk weightings.

The hope is that they will work. Clearly RBS’s shareholders don’t believe so. It would seem that they are discounting for the effect of the one policy option remaining: Nationalisation.

Nearly matching RBS’ £1.9 trillion of assets, RBS has £1.8 trillion of liabilities.

To put that into perspective with regard to the (small) risk of nationalisation: inclusive of the Northern Rock nationalisation, the UK public debt, defined by the ONS, is currently only £650bn. Nationalising RBS would increase UK public debt 369 per cent.

So surely nationalisation is off the cards…?

And the icing on the cake came from the European Commission:

The eurozone economy will shrink 1.9% in 2009 and grow by only 0.4% in 2010, the European Commission has forecast.

The Commission said in a statement that the whole European Union was facing a “deep and protracted recession”.

Unemployment in the the 16 countries using the euro is expected to exceed 10% in 2010, up from 7.5% in 2008.

The commission hopes it will be possible “to create the conditions for a gradual recovery in the second part of 2009″ in the eurozone economy.

With so much bad news one would think that sentiment amongst investors is rock bottom and that therefore it makes sense to take the other side. Believe it or not, but investors are actually quite positive. At least the 250 clients of Morgan Stanley’s Teun Draaisma who reached the following consensus view recently:

We are not facing a Japan-style situation, as the policy initiatives will have the desired effect in 2009. A variety of questions focused on the possibility that we are facing a Japan-style period of low growth and inflation, little policy traction and ever falling bond yields. Only 4% believe we are in Great Depression 2 (GD2). Only 13% expect a deflationary downward spiral. 84% think the equity bear market will end in 2009 or has already ended.

Buy risky assets, especially credit. 74% of respondents prefer equity (26%) or credit (48%) markets as best asset class in 2009. Only 1% believes the S&P 500 will end the year below 600, while 73% expect it to be above 800. • There is a bond bubble. 86% believe bonds are in a bubble. 61% expect Brent oil to be above US$50/bbl at the end of 2009, 87% expect bad deflation will be avoided.

The US dollar will not fall.

Only 9% thought the dollar would be below 1.50 to the euro by the end of 2009. The US was also by far the preferred equity market. Europe was the least popular.

Go figure.

<em>Photo courtesy of <a href="http://www.flickr.com/photos/44124440559@N01/" >Xirzon</a></em>