Country Risk: Wall Street’s New Myth
Posted on May 7, 2010
I haven’t really been bullish for awhile, but the reasons given for the current market sell off are mostly ridiculous and I think should fade shortly.
Below is a good summary of Wall Street’s current mythical creation intended to instill fear and profit from losses: Country Risk.
“The market realizes there is actually a country risk,” said Achim Matzke, head of global index and technical research at Commerzbank AG in Frankfurt. “Since Lehman’s collapse the banks were in focus, now it is the credibility of countries.”
Since for various reasons, country risk for a sovereign currency, like the Euro, is one of the most absurd concepts I’ve heard in a while, one wonders how far Wall Street will take this myth. My guess is not that far and I think the myth will die out shortly and Markets will stabilize rather quickly. This is because the only real risk here is from the leaders of these countries shutting down the whole Wall Street casino of CDS’s, if this new money-making scheme of denying countries capital gets too out of hand.
My only real question is why politicians are still acting so slowly? One theory is that they don’t want to offer a solution, since doing so would seemingly lend credence to the country risk myth and establish it as a legitimate short opportunity. Alternatively, the majority of politicians still actually believe that there is a limit on a sovereign currency, and so they too are buying into the country risk myth.
In any case, governments will have to act soon, because Wall Street’s marketing machine is making the country risk myth a reality anyway.
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Individual country risk is real but survivable; everyone knows the drill. The risk to the EU on the other hand is very unknown. The euro is an interesting experiment. I am not so sure that the political will is there for the EU central bank to rigorously buy sovereign debt, if that becomes necessary, or to bail out the big banks.
Over the long run, Germanic steady tight money policy may be too much for the Southern tier of countries to accept. Too many may become financially disenfranchised so that they force a break with the EU. Monetary disunion seems more likely than cooperative political union.