So what are the Credit Cops telling us?
First, most countries are perfectly safe. It costs .15% to insure Norwegian debt for five years—the most creditworthy country on the planet. They have annual oil revenue equal to about 20% of their economy. By comparison, the US costs .40%, Switzerland .50%, England .80%, Spain 1%, and Greece 3%. The real global basket cases are Venezuela and Argentina, at 10%
Second, Greece has issues, but they’re related to funding, not solvency. It costs more to insure short-term Greek debt than long-term debt. That’s unusual. It means that investors are concerned that Greece may have trouble in the next six months, but if they clear those hurdles, their debt is no riskier than, say, Egypt.
Finally, there’s no comparable situation here. The most exposed sovereign issuer here is the State of California, with its yawning $20 billion budget gap and default swaps at 2.8%. But the State has a massive, diversified economy to draw upon, and a history of muddling through. It’s highly unlikely that they will default on their general obligations.
The world has gone through a difficult time. But it’s good to know that the Credit Cops are on the beat. They can tell us a lot, if we listen.
Douglas R. Tengdin, CFA
Chief Investment Officer
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