QUESTION: Dear Martin I have a question for the blog. There has been forecasts for a sovereign debt crisis but recently you have discussed how various governments may manipulate govt bond interest rates down as has happened in Europe and Japan. If Europe and Japan are anything to go by then this could go on for some time. If govts are successful in this, does this mean that there may not be a sovereign debt crisis?
ANSWER: The Sovereign Debt Crisis involves crossing the line where the private sector no longer trusts government debt. We have begun to cross that line in Europe and Japan where the central banks are buying the debt in bulk. There have even been German auctions of bonds where there was no bid.
Yes, the central banks can artificially keep government interest rates low, but that is only possible when they are the buyers.
We are already experiencing rising interest rates in the peripheral governments where their central banks do not engage in QE — namely emerging markets. We will witness private rates rise for that is a free market. However, from the government side of the table, the Sovereign Debt Crisis is among the developed countries engaging in QE that has unfolded as there is NO BID. They can artificially keep rates low ONLY because the central banks buy the debt. Nobody in the private sector would buy 10 years paper at 1% to 3% when they need 8% to break even in pension funds.
Also, pay attention to the state/provincial debt where they do not have the ability to buy their own nonsense. The manipulation of rates will be at the federal level, not in the state/provincial and municipal levels of government.
So, pay attention to the bifurcation in rates that is unfolding between PUBLIC v PRIVATE.