Morgan Stanley says debt crisis is just beginning!
NEW YORK - August 25, 2010 - This spring's bond market tussle in Europe was just a warm-up, Morgan Stanley says. The investment bank warns in a report Wednesday that the sovereign debt crisis is far from over - and won't end till deeply indebted rich country governments give holders of their bonds a good soaking.
The remarks amount to the latest warning issued to investors who have herded into government bonds this month, following a downturn in U.S. economic indicators and a series of anxious-sounding comments from Federal Reserve officials. The yield on the 10-year Treasury bond has plunged to a recent 2.45% from the already low level of 3% at the end of last month.
That rally surely has been driven in part by fear that the world is in for a long period of subpar growth. But it has been aided, the report contends, by the observation that holders of government bonds (and bonds issued by too big to fail banks) have received what amounts to preferential treatment during three years of crisis.
That can't go on forever, analyst Arnaud Mares writes in the firm's first Sovereign Subjects report.
"The question is not whether they will renege on their promises," he writes of rich country governments, "but rather upon which of their promises they will renege, and what form (will these defaults) take?"
