Sovereign Debt: Further comments on the use of the domestic market

In a blog posted on 22/09/2011 I suggested that in order to contain the contagion of the sovereign debt crisis, Italy, Spain and other major countries could tap their domestic markets which enjoy a high saving ratio and would be much more stable than International Institutions.



This blog is to elaborate on the potential use of such issues.



The launching of such bonds could be undertaken now even if the funding program for the rest of the year is already covered. The funds would be used to prevent the outstanding bonds in the secundary markets yielding more than say 5.5 to 5,75%. Taking into account the marketing expenses to place in the retail market the overal cost would reach say 4%. Therefore the current discounts would present profit opportunities.

The gradual replacement of International Investors by domestic savers and Institutions would stabilise the market of the sovereign bonds of the States concerned.



The ECB would no longer be the sole supporter of the secundary markets of the States concerned.





Finally, the more important objective would be to shield the major States concerned from contagion from Greece. If this is achieved a more realistic restructuring of the Greek Debt could be contemplated with a significant haircut (50 %).




The markets are longing for remedies which look credible.