Confidence as a business idea

Over a few postings I have written about Greece. The most recent development is that the euro countries promise to support Greece when no other option remains. Furthermore, the descision to support Greece has to unanimous. No amounts have been presented, again only abstract promises. The famous line from the movie Jerry Maguire comes to mind, "Show me the money". Until the cash dedicated to Greece's rescue has put on the table, any promise is not for real, or just another round of bazooka waving. The problem is that every time a useless agreement like this is made regarding Greece, the EU's confidence is deteriorating bit by bit and the market will eventually see the bazooka for what it really is, a pea-shooter.

So what if Greece is saved? It is of little concern since within the euro zone the PIIGS remain, and within the EU also the UK is loaded with debt at an alarming rate. Maybe the agreement will really hold for Greece, but the EU will not be able to bail out every country in the EU that needs an bailout.

The above is especially interesting since over the last week, the US sovereign bonds crashed. It may or may not be realted to the bond auctions taking place, or the health care bill that was passed, but the fact of the matter is that, since inflation still is non-existing, risk in sovereign debt is picking up significantly. When risk increases, so does interest rates, and with increased interest rates, financing costs for almost everyone increases too. To me the only unknown is for how long central banks will be able to keep short term interest rates at the present low levels. This is key since short term borrowing is financing ever more of the debt and if and when short term interest rates starts to rise, many borrowers ranging from home owners to countries will find that they have no place to go, but into default.

When monoliners such as MBIA and Ambac went bankrupt it was said that a company whose core business idea was to have a high rating is bound to go under. Something similar can be said about governments and low interest rates: When the only way to survive is to keep interest rates low, then you will soon find that lenders require a higher compensation for the increased risk in the form of higher interest rates. Eventually you find yourself between a rock and a hard place. All that debt, you should have avoided it in the first place.