This though alters a fundamental relationship where debt of sovereign countries was seen/treated as part of capital base of financial institutions at least within their borders. As the country regulators, the European Central Bank (ECB) and IMF have urged banks to “clean-up” their balance sheets, the sale of European country debt has been the most noteworthy result. This though has had effect of fire-sale type immediate losses being realized. The longer term consequences could be even more eroding. Numbers Mind Boggling & Difficult to Pin-Down: The total numbers are difficult to fully ascertain. A conservative estimate is that $4Trillion in European sovereign debt has changed hands. Some of this could be repeat trades, and it is worthwhile to recall that just Italy has outstanding more than $2Trillion in debt. (Also recall that most sovereign debt is of shorter duration requiring constant rollover and thus confidence in the sovereign’s credit to be refinanced). Most of the debt unloaded has been of the troubled economies of southern Europe. Again, it is difficult to fairly estimate; however the immediate losses could run into tens of billions of dollars as the sovereign debt is sold into the financial markets and to private investors. The new investors are also more difficult to ascertain and categorize, but are believed to include a significant degree of speculators. The longer-term consequences though could be even more troubling. “European regulators and leaders are shooting themselves in the foot because a big investor group for sovereign bonds has been taken out of the market,” Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd points out. “The downward spiral will continue until policy makers find a back-up solution for the sovereigns.” (From Bloomberg services) “Risk-Free”? Sovereign debt’s “risk-free” status has been part of a critical relationship between banks and their host countries. That sovereign debt was seen as part of a capital base or risk free in evaluating a bank’s balance sheet similar to US based banks and holdings of US Treasuries. This also provided the sovereigns with a ready-made market to refinance their debt. This of course may have contributed to over-leverage and overextended government spending and borrowing. Nonetheless, there is no real alternative to the institutional character and volume with which banks can buy and hold sovereign debt. (Pension funds, insurance companies and central banks may also be significant institutional holders of sovereign debt – highly rated sovereign debt such as US Treasuries and Bunds may be part of another nation’s reserves, as in Asia). Corporate Debt Becoming More Favored Over Sovereign Debt? For a stable global financial markets and economic environment it is not about the banks just having “clean balance sheets.” It is even more about restoring confidence in sovereign debt so that banks and other financial institutions can hold such with a high degree of confidence again. This foundation has not been restored, and perhaps austerity overtime may work in this direction. However, the turmoil felt by financial markets and economies is the ongoing thud of sovereign debt falling into the auction block – and most critically the divorce of banks from their governments’ sovereign debt. It is perhaps most telling about respective financial/fiscal health that it is becoming ever more common to see corporations rated more highly than their domicile country, and for corporate bonds to increasingly replace sovereign debt on institutional balance sheets. Rising -Up to Task as One or at-least as EFSF? While governments are scrounging for funding, corporations now hold unprecedented reserves of cash – of course some of these may be in form of sovereign debt and such non-financial corporations may be buyers of some of the distressed debt directly or through hedge funds. As you can perhaps sense, it is a bit of a circle with potential for a vicious cycle. In other words, the foundation has to be restored at level of confidence in sovereigns and their debt. The ECB, Eurozone as one and its current alter ego, the EFSF (European Financial Stability Fund) still has to methodologically or perhaps in size rise to this challenge. Read – “LIKE FLAT CHAMPAGNE, AFTER G-20” - diplomaticallyincorrect.org/films/blog_post/like-flat-champagne-after-g-20-in-france-by-ambassador-mo/39983 ) Read –“Is ITALY Next GREECE?”- diplomaticallyincorrect.org/films/blog_post/is-italy-next-greece-by-ambassador-mo/40916 By Ambassador Muhamed Sacirbey Facebook – Become a Fan at “Diplomatically Incorrect”

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 International Financial Crisis Channel - diplomaticallyincorrect.org/c/international-financial-crisis