Sovereign debt vulnerability and systemic risk
Posted on 10. mai, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
The chronicle of the financial events of the last three months has been crystal clear:
A global bubble on all risky assets developed since the unprecedented accommodative policy set up by Central Banks and Governments. From a monetary point of view, global rates were set around 0% and liquidity injections in the US have not been withdrawn, contrary to initial planning. From a fiscal point of view, developed countries pursued their frivolous spending pushing the average deficit of G7 countries to-8.3%of GDP and the average debt/GDP ratio to 81%, the highest ratio ever reached since the end of World War II.
As a result, markets started rising in synch with unprecedented complacency from corporate credit, commodities and carry trades to equities.
Revealing of the amount of risk accumulated in financial markets, Riskelia’s global bubble indicator reached worrying tops in January:
Then, as of January 2010, the sovereign debt vulnerability was demonstrated by Riskelia’s Radar as well as its connection with the banking sector:
Last but not least, a definitive alert on the banking sector was observed as of 30 April 2010 by the Risk Aversion’s Radar:
Spillover effects are now unfolding, hitting equities, commodities, carry trades and corporate credit. Contrary to markets’ tales, the S&P’s demise is not only due to a fake sell order of 16 Bil USD instead of 16 Mil USD. Of course, such a mistake may have made the S&P’s descent worse. But, the S&P demise is more probably the result of a contagion mechanism originating in the carry trades, whose collapse have preceded the one of the S&P. Traders’ positions and unwinding strategies are so stereotyped that any local weakness automatically spreads to every part of the system. This process is perfectly illustrated in the Bloomberg intraday chart representing the evolution of the different asset classes. This new evidence is a serious blow at the official story of the “ fat finger”:
What is in front of us?
Every part of the financial system has been infected as proved by Riskelia’s Radar:
The current market relief should not make us forget the high level of risk that is now present in the market: in absence of a credible resolution of the global sovereign debt problem, last week’s financial seism will look pale in comparison of what is in front of us.
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