Sunday, 3 January 2010


“Is Sovereign Debt the New Subprime? That’s a question many on Wall Street are asking as 2009 comes to a close.” (or you could also click here)

Anyone interested in this would be advised to ignore the previous links and instead read Willem Buiter’s blog posts from (off the top of my head) a lot of 2008/early 2009, although doing so would raise a number of bloody obvious points (1) its not a new risk (2) seriously, its not a new risk, (3) I’m not joking, its not a new risk and (4) I’ve no idea why Buiter wasn’t cited in Prospect’s list of the 25 people who’ve contributed the most to public debate over the financial crisis other than the fact political economy really is Prospect’s gaping big whole of a weak spot.

Government borrowing and the concerns it's creating are already prompting clear responses. The Irish government, fer instance, has announced the following 2010 cuts in public spending –

• Public servants pay cuts ranging from 5% on those earning 30,000 euros to 15% on those earning more than 200,000 euros
• 760m euros on social welfare
• 980m euros on day-to-day spending programmes
• 960m euros on investment projects.
• A 16 euros per month cit in child benefit

So describing sovereign debt as the new sub-prime as if the discussion was about hemlines is an offensively off-hand way of referring to a situation that's already damaging the finances of millions of people. I mean whats so fashionable about cutting child benefit?

And for a phrase that’s being used so knowingly it’s actually a piece of shit comparison. Sub-prime was regarded as triple A by the exact same people now doing down sovereign debt. It's subsequent implosion highlighted the rating agencies’ deeply rooted technical inadequacies and the ignorance of the vast majority of the financial system (including “many on Wall Street”) what with a credit rating being a measure of probability of default i.e. an assessment of what is likely to happen in the future as opposed to the codification of a retrospective kneekerk. And because allova sudden no one had an utter scooby what the risk sub-prime posed actually was, the resultant uncertainty and associated crisis of confidence was what caused much of the credit crunch's damage to the global economy.

By contrast, people comparing sovereign debt with sub-prime typically trot out a list of countries that may or may not include Greece, Spain, Ukraine, Austria, Latvia, Ireland, Argentina and Mexico as evidence to substantiate their argument. This is all very well except the fundamental point about sub-prime was there weren’t any meaningful, direct comparators. Hence being able to cite relevant examples and historical episodes by definition makes clear sovereign debt defaults are nothing new nor particularly unquantifiable. Or to get all Donald Rumsfeld on your ass sovereign debt defaults are a known-unknown whereas sub-prime was so destructive precisely because it was an unknown-unknown. And just don’t talk to me about the fact that with this wee thing called the IMF there’s already a clear, if painful, safety net in place for national economies and their debt, another factor which didn’t apply to sub-prime (after the monolines went phut anyway).

So why make the comparison if it's spurious and poorly thought out? For one thing it’s catchy enough to comply with the media’s goldfish memory and bad news fetish. For another it's a product of underlying prejudices about government borrowing and spending. And finally, it reflects the position and associated ignorant arrogance of those making it; they’re not going to be affected by child benefit cuts so as a rule don’t give a fuck. Hence this post's title, which I’m putting forward as the universal response to anyone ghastly enough to call sovereign debt the new sub-prime.

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