Investors pay Switzerland to borrow from them

JUUGS Aug12.png2 years ago, Italy was paying 3.82% to borrow for 10 years (red column). Spain was paying 4.11%. These rates were similar to the UK’s 3.07%.

A year ago (blue column), the world was clearly changing. This led the blog to introduce the concept of the JUUGS (Japan, UK, US, Germany, Switzerland), as a ‘safe haven’ compared to the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

Its argument was that investors were becoming much more interested in return of capital, rather than return on capital. This was due to the:

• Ageing population in the West, which needs to save more (and securely), for its retirement
• Loss of confidence in stock markets, which seem to have become a casino ruled by computerised trading

As the chart shows, these trends have continued in 2012 (green). Rates in Spain and Italy are now close to the 7% level where repayment becomes impossible. Thus they are in danger of joining the other PIIGS as candidates for formal debt restructuring.

Meanwhile, rates continue to fall in the JUUGS. They now average 1.2%, compared to 1.7% a year ago and 2% in August 2010. Even more remarkable is that investors are now paying interest to Germany and Switzerland when they lend money for a 2 year period:

• Investors pay Switzerland 0.36% when they lend
• They pay Germany 0.03%

Thus, as we argue in chapter 2 of Boom, Gloom and the New Normal, the Western world is following the Japanese model. Sadly, policymakers are pursuing exactly the samed failed policies as Japanese central bankers a decade ago.

Japan’s current central bank Governor has spelt out the issue very clearly in a series of speeches:

“The implications of population aging and decline are also very profound, as they contribute to a decline in growth potential, a deterioration in the fiscal balance, and a fall in housing prices.”

But it seems nobody in a position of power in the West wants to listen.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

4 Responses to Investors pay Switzerland to borrow from them

  1. Chad Brick 20 August, 2012 at 12:37 am #

    You do seem to neglect one obvious point – four out of five of the countries on the right of your chart have their own currency. The one that does not, Germany, dominates the Euro. The ones on the left do not have their own currency and are at the mercy of Germany’s monetary policy. This is the fundamental problem facing Europe in the short-to-medium term. You are correct that demographics is a major long-term issue, but it was not something that suddenly got orders of magnitude worse in the second half of 2008.

  2. Paul Hodges 20 August, 2012 at 8:36 am #

    Brad

    Many thanks for your comment.

    I actually think the core issue is slightly different. The problem I see with the Eurozone, as I have noted several times, is a structural one. I don’t believe you can have a monetary union without economic and political union. Thus, to survive, the Eurozone will have to become like the USA or UK. But will the voters agree to this change? Historically, Germany has been positive on this issue. However, France has always resisted, which is why we are in today’s no-man’s-land.

    On this reading of history, 2008 does indeed become a defining date. Until then, investors could fool themselves that all Eurozone countries were the same. And so interest rates equalised, on the basis that sovereign risk no longer existed. Now, investors are painfully realising that sovereign risk does indeed still exist – whether or not one is in a common currency – because of this lack of economic and political union. So the PIIGS go one way – in the direction of higher rates – and Germany goes the other.

    My argument is thus that return of investment has come to dominate debate since 2008. And this is because of the ageing Boomers, for whom the start of the financial crisis was a long overdue wake-up call. They have realised since 2008 that the pursuit of high returns equals higher risk. And risk is something they wish to avoid, hence their preference for the JUUGS.

    Hope this is helpful

    Paul

  3. Jorge 21 August, 2012 at 1:11 pm #

    Dear Paul,

    What is the real problem for modern economics to live without inflation? The younger and fewer generations need lower prices for the new demographic changes.

    Would perhaps the New Normal impact Western nations in a negative order because they are losing socio-economic power to the East?

    Technology advances will help upcoming generations (double edge sword) to overcome the problems of the future. If today, the right economies focus in bringing value.

    Rgds,

    Jorge

  4. Paul Hodges 22 August, 2012 at 8:35 am #

    Dear Jorge

    I am in full agreement with you.

    The world has had deflation for much of its existence, if one reads the OECD’s summary in its Millennial Perspective. And it seemed to survive.

    I suspect the inflation/deflation issue today is partly due to our shifting from an expansionary mode of credit creation, to a deleveraging mode. When banks are lending fast and furiously, this brings forward demand, as people do not have to save up before buying. Today, of course, deleveraging means this process is going into reverse.

    I also agree that the New Normal, like technology, is neither good news nor bad news. Its simply a fact of life. If countries and companies move forward and take advantage of its positives, then they will do well. If they don’t, they probably won’t.

    Thanks for the comment

    Paul

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