Roll On Sovereign Hockey Puck. Roll On: Model Portfolio Update

• Gregor Macdonald
• February 10th, 2010

In this weekend’s Macro Note to subscribers, I posed a question about the spread of risk in sovereign debt.  And, I suggested the following first step to a model for how this turmoil eventually plays out among the candidate countries of the world. I was struck that so many assumed the contagion would proceed in orderly fashion from periphery to core, in all cases. I saw (and still see) other possibilities:

The simplest matrix on the evolution of trouble in sovereign debt, therefore, would point in four directions: Debt defaults or debt price-crashes will 1. move from the periphery to the center. 2. move from the center to the periphery. 3. move all at once in unison. 4. move in chaotic fashion between the center and the periphery.

This week saw a dramatic turnaround in global asset markets as the inevitable rescue package for Greece began to work its way through the European governments(s) but it was not long before the hockey puck turned its attention to Germany–which was correctly presumed to be the anchor country for any Greece bailout–and also the United Kingdom.

Greece, while helpfully symbolic, is unimportant. It has a GDP comparable to the state of Connecticut, and a population comparable to Ohio. In my Seven States of Energy Debt I noted that a number of these peripheral European states are easily matched and exceeded by similar problems with debt and unemployment in states like California, Illinois, and Florida. I remain with my view, therefore, that it will not take long…(this article continues for subscribers through the membership gateway, on the right side of this page)

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