Wednesday, 6 October 2010

Are Governments more risky than some banks?

Until the full force of the credit crunch hit the investment landscape during 2007-2009 this question would have been brushed aside with a quick No! At least this was the situation in the 'developed world'. But during the past year the cost of insuring against the default by the state in many a 'developed' country has regularly surpassed the cost of insuring against the default by a large commercial bank.
After the mini-panic of May 2010 when a default by an EU member state suddenly looked more than likely the markets have calmed down. The pricing of government debt allows investors to make a rational analysis of the likelihood of future default and this has calmed the markets - for the time being.
We think that the burden of excessive and unproductive debt carried by many governments will eventually be whittled down by inflation. The resulting loss in purchasing power will be the involuntary contribution made by savers and investors to finance the politician's pet spending projects.

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