Friday, 29 May 2009

Countries don't go broke - do they?

I am a great admirer of the journalistic and literary skills of Gillian Tett from the FT. She showed great insight throughout late 2007 and 2008 in covering the debacle in the shadow banking system and the world of structured finance. In an article at the FT Alphaville site she is quoted as follows:

If government bond jitters turn more serious – say, if some auctions fail or there is serious political instability – it is entirely possible to imagine a far darker scenario, in which faith collapses in government finance. If that occurs, we would face both currency upheaval and more bank turmoil, as investors lost confidence that the state can keep propping up the banks.

It is rather disquieting that the financial house of cards now rests, as she suggests, on the continuing faith in government finance. All of it underlines the need to keep close watch of how well government auctions are going and how much Q.E. fire-power is being allocated for smoothing over the bumps along the way.

On an historical note it may be worth remembering the oft quoted remark from Walter Wriston, a former chief at Citibank as it was then known in the 1980's. Wriston, stated confidently in 1982 that: "Countries don't go broke". Shortly after his statement, Mexico, Brazil and Argentina defaulted inflicting near mortal losses on Citibank. (I am grateful to Satyajit Das for this anecdote)

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