Sovereign Debt Reaches Junk Bond Status

Michael Milken, the junk bond king, who lost his reputation and hair piece when he went to prison for violation of securities laws in 1990, would appreciate the struggles of Portugal and Greece. The two nations will almost certainly have to pay exorbitant interest rates to raise money to cover their deficits. And, there still may be very few buyers because of the perceived risk of default.

Some sovereign debt has reached junk bond status.

The FT recently reported that China might buy $25 billion euros in Greek debt, but that is still far from certain. The Greek dilemma has moved the interest rates it pays on its bonds to nearly 7%.

Portugal posted an unexpected short all in its budget. The Wall Street Journal pointed out that “the cost of insuring against a sovereign-debt default rose for Greece, Portugal, Spain and Italy recently”

Sovereign debt requirements are  so substantial that nations find themselves competing for funds in the world’s capital markets. The US raises close to $100 billion a month and that takes a great deal of the money that is likely to invest in national debt out of circulation. This leaves less credit worthy nations to fight for what is left. Ultimately, these weak countries are also competing with debt issued by multinational corporation with strong balance sheets. GE’s (GE) bonds are rated as a safer investment than Greece’s.

The high yield bond has become part of the landscape of sovereign debt. Greece could certainly end up faced with paying 7% to 8% on the bonds that is issues. The Greek debt service as a part of its budget will sky-rocket which increases the need to cut national expenditures even further. Milken and his network of junk bond buyers might have been able to buy most of the Greek debt inventory, but the junk bond king is retired.

Douglas A. McIntyre