Earlier this year, if you asked anyone whether or not they would actively and happily hold on to Eurozone sovereign debt for the long run, the answer would probably have been a laugh and a strong "no". Having just been through a moderate sovereign debt crisis in countries such as Greece and Spain (and these issues are of course continuing) – it would be fairly naïve to predict that people would be overly happy to hold Euro sovereign debt for the long term – right?
Wrong. Apparently, Eurozone debt is just as attractive as it has ever been, only that now investors are being hugely rewarded for holding it. Credit default swap spreads have widened over the past few months to levels similar to those when the debt crises started for these countries, but there is a significant difference this time around.
The difference is that investors do not fear a default by any of the countries involved! In fact, a recent survey of investors found that sovereign debt trading is actually more reliable than currency trading in the current market environment.
This is a big turnaround from January and February of this year. In fact, the turnaround in attitude is almost inconceivable.
So what about the ratings agencies? Don't they have a say in all of this? Yes – of course they do, and their reaction to the whole situation has simply been to downgrade Eurozone sovereign debt over and over again. But investors are slightly cleverer than to simply take the credit rating agencies for their word. They know that whilst a credit rating for an individual country might be bad, the Eurozone is not just comprised of a single country.
Indeed, as we saw in the case of the Greece situation, Germany played a huge – and arguably dutiful – role in rescuing the country. If the Germans hadn't have come to the party, the entire Eurozone would have felt the fallout of the debt crisis.
Therefore, it would appear that whilst the German support for Greece (and Spain) has come and gone, investors believe that the country will still be there to provide financial support for any other Eurozone members who inadvertently fall in to trouble in the coming months. If Greece was able to get a multi-billion EUR bailout, there is absolutely no reason why a similar package couldn't be given to other Eurozone countries.
And therein lays the reason why Eurozone debt is attractive. Whilst not written on paper, Germany has a pact with all member countries that it will not allow them to default. The German insurance policy therefore allows investors to profit from amazing interest rates in some Eurozone member nations, whilst being supported by the main player – Germany – should anything go wrong along the line.
Wrong. Apparently, Eurozone debt is just as attractive as it has ever been, only that now investors are being hugely rewarded for holding it. Credit default swap spreads have widened over the past few months to levels similar to those when the debt crises started for these countries, but there is a significant difference this time around.
The difference is that investors do not fear a default by any of the countries involved! In fact, a recent survey of investors found that sovereign debt trading is actually more reliable than currency trading in the current market environment.
This is a big turnaround from January and February of this year. In fact, the turnaround in attitude is almost inconceivable.
So what about the ratings agencies? Don't they have a say in all of this? Yes – of course they do, and their reaction to the whole situation has simply been to downgrade Eurozone sovereign debt over and over again. But investors are slightly cleverer than to simply take the credit rating agencies for their word. They know that whilst a credit rating for an individual country might be bad, the Eurozone is not just comprised of a single country.
Indeed, as we saw in the case of the Greece situation, Germany played a huge – and arguably dutiful – role in rescuing the country. If the Germans hadn't have come to the party, the entire Eurozone would have felt the fallout of the debt crisis.
Therefore, it would appear that whilst the German support for Greece (and Spain) has come and gone, investors believe that the country will still be there to provide financial support for any other Eurozone members who inadvertently fall in to trouble in the coming months. If Greece was able to get a multi-billion EUR bailout, there is absolutely no reason why a similar package couldn't be given to other Eurozone countries.
And therein lays the reason why Eurozone debt is attractive. Whilst not written on paper, Germany has a pact with all member countries that it will not allow them to default. The German insurance policy therefore allows investors to profit from amazing interest rates in some Eurozone member nations, whilst being supported by the main player – Germany – should anything go wrong along the line.
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