The prospective collapse of sovereign borrowers is deflationary. Nothing, in fact, is more deflationary. You can’t pump more air into the balloon if the balloon starts to leak. A Fitch table of “implied credit ratings” for sovereign borrowers published today in the FT’s Alphaville blog is worth a second and third look:

Trouble starts in the 80 bps range: Italy, Spain, and then of course the prospective basket cases of Greece and Ireland. That creates an interest problem for diversification out of the dollar: in the debt of which country do you put your money if you happen to be an Asian central bank?

There are four prospective problem cases in the EC–Greece, Italy, Spain and Portugal. Germany is of course quite sound, but will Germany allow southern Europe to get into really serious trouble?

Moody’s, meanwhile, indicates that a number of sovereign borrowers are moving out of AAA territory by the simple measure of interest payments as a percentage of GDP:

Under US government projections, debt service will exceed 10% of GDP by 2013, which means that by one measure the US will move out of AAA territory. But the UK, Germany and France will be headed in the same direction.

If I am correct that economic weakness continues unabated through the next couple of years, the situation will be considerable worse than the Moody’s graph suggests, and governments will have difficulty funding themselves at today’s extremely low interest rates.

This should be good for the dollar, and good for gold.

Alternatives to the dollar will start to look worse, and alternatives to currencies (namely gold) will start to look better.

This entry was posted on Tuesday, December 8th, 2009 at 11:45 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.