Newswise — “The European debt crisis shows no signs of slowing down as fundamental problems with countries in the Eurozone go unaddressed. These problems have to do with excessive internal spending on programs that are unsustainable in the long run in the face of a work force that is aging rapidly and becoming outdated in terms of productivity and technology. While Greece is a perfect ‘showcase’ of national mismanagement in the new, global economy, similar problems are found throughout the entire continent. Given the current state of affairs in Europe and abroad, it is just a matter of time before most European sovereign debt is downgraded, including even Germany’s bonds.
“The potential downgrades in triple A-rated European bonds might increase the demand for bonds from other countries — but which countries?
“Highly-rated bonds from countries like Australia, New Zealand and non-EU European countries might be an option, but these markets are too small. Investors might consider alternatives such as Brazil, India or South Africa, but the debt of these countries is much riskier and their markets are also thin.
“A likely outcome from all of these movements is that U.S. debt might receive more attention going forward. The U.S. private sector, mostly large corporations, owns more than $2 trillion in cash and liquid assets in their balance sheets — and most of these cash-like assets are held in the form of safe securities. Anecdotal evidence suggests that CFOs of large companies in the U.S. and Europe were already switching their liquidity holdings away from European sovereign debt into U.S. treasuries. Given the recent reluctance of countries such as China, South Korea and Brazil to hold U.S. debt, this shift by the private sector may, surprisingly, have beneficial effects for the U.S.”--Murillo Campello, professor of finance at Cornell University’s Samuel Curtis Johnson Graduate School of Management
RSS