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The Sovereign Bond Crisis: When Collateral Kills

By Nickolai Hubble, Daily Reckoning.com.au:

The sovereign bond crisis is going to play out in a way you don’t expect. It’s going to get you by the back door, just like the sub-prime loan mess did. In fact, the very same back door.

‘It’s all got to do with collateral, you see.’

There’s a joke around the office about certain statements which should never be used on a first date. And that one was a winning entry. But that doesn’t mean it is not all about collateral. The stock market, the bond market, the entire economy – they are all about collateral. At least collateral is the crisis trigger that keeps popping up to ruin your day. Here are some examples of how –

Mortgages failed in 2007 because the collateral in the lending agreement (the house) fell in value. The fancy pants creations from Wall Street, which repackaged those mortgages into investments for unsuspecting investors, failed because the collateral (the mortgages) failed.

Then the investment banks started to struggle because the collateral they used in their short term borrowing (the mortgage bundles) failed. The banks had to be bailed out by the governments, which made the governments’ financial position worse. So now the supposedly safest collateral the banks use to secure funding (sovereign bonds) is failing too!

Read More @ DailyReckoning.com.au

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