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Who the hell is buying European debt?

January 6, 2012

I’m a bit confused about the “successful” European sovereign debt auctions we’ve been hearing about lately.

If I’m a European bank, say in Italy, Spain, or Portugal, or maybe even France, then about 10 months ago or so I’d be buying all the sovereign debt of my own country that I can get or that my country wants me to, because I’d figure, hey we’re in the same boat- if my country defaults then we’re going down, probably exorcised from the Euro zone.

But nowadays, because of Greece’s example, it seems increasingly likely that a country could default on its bonds, and if orderly (and “voluntary”), the country gets to stay in the Euro zone and the banks get to live on- if they can.

So if I’m a European bank now in a peripheral country, I’m going to try to stay solvent in the case of my country’s default. And I don’t even need to be completely solvent, I just need to be more solvent than most of the other banks in my country, because, especially if the Euro zone does stay intact, they probably won’t allow all the banks to fail, but they might easily let the weakest banks fail.

Wouldn’t that reasoning mean I’d avoid buying my country’s crappy debt? So why is crappy debt bought at all anymore? I realize that the yields are high, but I don’t think they’re high enough, and I just don’t get it. Maybe I’m being dumb. Here are the possibilities as I see them:

  1. I’m exaggerating the problem altogether, and the debt is actually fairly priced and not so risky. In answer to this let me quote Princeton economist Alan Blinder, a former U.S. Federal Reserve vice chairman, in this Wall Street Journal article about what to worry about in 2012: “Europe is absolutely my No. 1 concern. It is so far in the lead I can’t think of what my No. 2 concern is.”
  2. The governments are putting backroom pressure on the banks to buy their debt. This seems quite probable. I definitely get the impression that there’s real politics behind the accumulation of Greek debt in French banks, for example, because otherwise the enormous holdings in BNP Paribas and others is frankly impenetrable, and certainly not in the interest of the bank itself.
  3. There is some short or medium term gaming of the system going on right now, using the ECB’s recent action to restore “liquidity” in order to look better. Specifically, we have this quote from Bill Gross of PIMCO: “Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another.”
  4. Actually, the next time peripheral countries issue debt nobody will show up to buy it.

I’d love to hear comments from people who have different theories.

Categories: finance, news
  1. vbounded
    January 6, 2012 at 2:05 pm

    You’ve complained about being annoyed at bad modeling. Most of the bad modeling I see is because the modeler is being paid to be an advocate, and is intentionally slanting things.


  2. jeg3
    January 6, 2012 at 6:40 pm

    The best place to understand horizontal money is Modern Monetary Theory (MMT) which correctly calls the EU countries debt “Non-Sovereign” debt (debt issued in a currency they don’t control) as opposed to the US which issues sovereign debt (debt issued in your own currency).

    Academic type MMT Blogs:




    Financial Blogs who use MMT (and correctly called PIMCO’s bad move)





    Have a Great Weekend


  3. January 6, 2012 at 8:14 pm
  4. FrankJones
    January 7, 2012 at 4:16 am

    You asked “who”, but the body of your post is about “why.”
    As to who is buying it, the Japanese and Chinese are buying it. Nobody really knows why the Japanese do what they do. The Chinese are buying because Europe came begging.


  5. January 12, 2012 at 4:04 pm

    Cathy, you don’t have it quite right. Some of the debt is ok while other debt is being bought by the ECB. This isn’t quite what should be done but that is how the Germans, who are incredibly neurotic about hyperinflation, are doing it.

    Suggest you read billy blog by Bill Mitchell.


  6. ketan
    January 19, 2012 at 1:30 pm

    i am toddler in this matter but…kindly correct me if i am wrong…. if they are selling (hypothetically) 600billion dollar bonds at 6%, then shouldnt they actually be earning a return of 6% or more but not less on that 600billion in order to be able to pay the yeild on tht bond. now if the countries gdp is xpected to grow at 2 or 3 % for the next few years, how is this supposed to work.
    i am a guy in india, trying to figure out every night what it is that eurozone is trying to do with all these bonds…. and dow seems to going up for the past one month while us holds pile of debt, which has been overshadowed by euzone debt.


  7. Martin
    January 19, 2012 at 8:27 pm

    The more near reality is Number 3 where ECB leans cheap money to bank so they can continue buying sovereign bonds. Bank in their accountability, take then at full parity 100% as if they keep until ends. So Bank problems is if they have a rush very people wants to have their money in their house. In that case they ask ECB to gave more money.
    If you don’t have a bank rush no problem (under their eyes).
    I now very well the problem in 2001-2002 at Argentina. It all began people don’t believing in the bank system, that it was one of the safest because the bank margin was 10%, so the bank money creation was only 10x. Spain has 2% margin, so the “banking money” is 50x, that how they build many cities that are right now “ghost cities”. Mostly banks in Europe are insolvent but the government are partners of them. THE MOST INCREDIBLE is still today the Euro is around 1,29 u$S, where shall be more nearly of their begining exchange rate of 0,80


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