Evercore Pan Asset

The problem with borrowing is that some days you have to pay interest on it, and one day you have to pay it off. Governments have tried to get round these two problems by a mixture on inflation and rolling over debts. Individuals are usually required to repay borrowings before they become too old or ill to afford it and repay it.

Today markets are asking whether the most heavily borrowed countries should still be able to roll over their debts and borrow more. Over €400 billion of Greek, Spanish, Irish, Italian and Portuguese debt falls due to refinance this year. Markets have said they will not undertake this at rates acceptable to the countries concerned. As a result three are having to borrow on special terms and with special conditions from the IMF and EU, and two are only able to borrow in the markets because the European Central Bank is busily buying up their bonds to keep the prices high and the interest rates low.

The USA has also amassed a mighty debt in recent years. Almost 60% of the $14.3 trillion outstanding debt of the USA has been borrowed by the last two Presidents, Bush and Obama. All the Presidents before Reagan combined only left 7% of the current total. That tells you something about inflation rates, and more about the sheer scale of the new borrowing in recent years. Whilst everyone knows the USA can print the money and pay the interest, there have been serious doubts about how much longer the USA can carry on borrowing at these levels without making serious adjustments to revenue and spending levels.

The world of government bonds has become polarised. In the favoured corner sit Germany, Japan and the USA. The downgrades to Japanese and US credit ratings and the high issue programmes have not forced up interest rates or forced down prices. Germany is agonising over how much Euroland risk to take onto its own balance sheet, with many thinking the Euro only has a future if Germany pays more of the bills, but her bond prices remain firm.

Can this carry on? You could argue that it is only the sovereign bonds of countries locked into the Euro that fall heavily as the market tests out the willingness of other members of the zone to go to their rescue. The other advanced country sovereigns will print what it takes and ensure the debts are repaid so all is well. That’s been the pattern so far. It may not last. The truth is printing enough to pay the creditors is usually inflationary. The USA, Euroland and even Japan will need to show they can control the build of their debts. One day markets will be asking the same questions of them as they are of some Euroland governments, if action to control the burgeoning debt is not convincing.