Sunday, January 17, 2010

Sovereign Risk

Good interview of Kyle Bass of Hayman Capital Partners by CNBC's David Faber. Kyle Bass made almost as much as John Paulson betting on the housing collapse. His focus now is on sovereign risk. The second part of the interview is what is interesting. The last couple of posts I mention that Greece to me is the New Century Financial and a warning of things to come. Kyle Bass has his crosshairs directly on Japan. According to Kyle 56% (I think that was the number) of U.S. debt is bought by people overseas. In Japan that number is 6% meaning the Japanese people are the ones funding its deficit. According to Bass the problem is that the demographic changes in Japan is going to cause the Japanese to become a net seller of government debt. The largest pension fund in Japan has told the Japanese minister that it has begun becoming a net seller. What that means is that Japan must go overseas to borrow money. Japan's debt will than reprice to have a higher interest rate. A one to two percent increase would have devastating consequences. He says the consequences for the US going down the same path are 10 to 15 years out. I would argue if he is right on Japan it will have massive implications worldwide for the U.S. and Europe long before 2020.

Entire video can be watched here.


Justin said...

Interesting, interesting. I agree that even a small jump in borrowing rates are going to be hell for the Japanese economy - remember when they raised rates by something like 0.75% back in 2006 or thereabouts and the little economic revival they had going was just snuffed out?

What about the Japanese Post Office though? Doesn't it hold $1.2 trillion in postal savings accounts? (25% of all household savings in Japan according to Wikipedia). Is it possible that those funds could be a source of cheap borrowing, if they aren't already?

I was always under the impression that Japanese pension funds were not of the same scale you might find in the US, UK or European countries, so perhaps the fact that they have become net sellers might not be as significant as you might think?

Just thinking aloud a bit....

Market Seer said...

I don't really know but I am assuming the Japanese Post Offices are treated like checking/savings accounts are they not? In that case my guess is that those won't all of a sudden flow into investment vechicles such as bond funds. Plus that isn't something new in Japan right? So there is no additional buying on the margin there.

Yeah, there is definitely an end coming. Just when. People have been calling for it for 10 years. Of course if you think about 10 years is a blink of an eye in economic history.