An Irresponsible Consequence?

Date: 4 Feb 2016

Japan recently cancelled the sale of March 10 Year Bonds due to the negative interest rates. Prior to that, the sale of  the 2 and 5 year Bonds too have been suspended.

The BIG QUESTION now is how Japan intends to fund itself, being saddled with a government debt that is 250% of its GDP.

It is not surprising that the Nikkei is crashing lately. I would expect mroe of the same scenarios worldwide as governments fall under the weight of their debts.

A 2014 report by McKinsey showed that Japan had a total debt of 517%, so this puts Japan as at the top spot as being the world most indebted nation.

China which had a total debt of 282% of GDP as at end of 2014, now has a total debt amounting to 346% of GDP. News came out that at least 25% of the debts are risky debts. So in the coming months,  would expect a wave of default among Chinese companies.

The US government’s debt just passed the US$19T mark. That’s almost US$1T increase in 2015 alone! Total US debts today stand at US$64.7T which is  355% of its GDP. Earnings season in this quarter could reveal that the recession in earnings which started in Q2 2015 has not abated and will likely fall further going into Q1 2016 earnings.

The shale oil companies will be among the first casualties. CNBC reported that almost half would likely declare bankruptcy int he coming months. This suggestion is based on the low oil price environment and and the wide spread among HY energy junk bonds. The continue distress could spread to IG bonds and unravel the financial derivatives which are valued between US$700T to US$1.5Q.

Talking about financial derivatives, the bank with the highest derivatives risk is none other that Deutsche Bank. The value of its derivatives is to the tune of US$64T  or more than 15x the Germany’s GDP of US$3.9T (Source: Coupled with a US$7B loss in Q4 2015, Deutsche Bank could be at risk. The negative interest rates environment in EU is also not helping the bank. The question is many people’s minds right now is, “Could it get worse?” The unraveling of a mammoth bank like Deutsche Bank could have far and wide implications on other banks across the globe.

Going forward, I think some of Japan’s major banks could face similar challenges in a negative interest rates environment.

With all these negative yields in bonds, isn’t it better to own gold and silver which although do not pay any interest, but at least the 0% yield is by far better than the negative yields in bonds?

About The Author


Author of the books “Invest In Foreign Shares!” and “Invest In REITs!” both books are available at Popular bookstores “Invest In Foreign Shares!” reached Popular’s top 10 bestseller in August 2014 in the non-fiction category

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