The Financial Times had a headline earlier this week that got surprisingly little attention: “European countries overtake top companies in debt risk league.”

As the FT explains it,

It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than for the collective risk of Europe’s top 125 investment grade companies, according to indices compiled by data provider Markit.

Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.

You could, perhaps, understand that an economic basket case like Greece would be a bigger default risk that a European giant like Royal Dutch Shell or Nestle.   But we’re not talking about Greece and the “PIIGS,” we’re talking about 15 of the richest and most advanced countries in the world–including Germany, France, and the UK!

Sovereign debt is, in theory, “risk free.”  So long as a country borrows in its own currency, it can never default; it could always print money to satisfy the claims.  Of course, in Europe this is complicated by the existence of the common currency and the European Central Bank.  European countries now are actually more like American states in that they have no currency of their own that they can inflate as a “safety valve.”  They can, again in theory, leave the eurozone, though this has never been done.  It remains to be seen how this would actually happen and what the effects would be on the euro.  (Our view is that it would create a major loss of confidence in the currency and cause it to substantially fall relative to the dollar and most other world currencies.)

All of this reinforces Harry Dent’s belief that in the years ahead sovereign governments will be at greater risk that top-quality companies.   This will be particularly true of much of Europe and of Japan.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy