Tuesday, March 23, 2010

Dollar denominated bonds...

...being issued by the Iberians.

There are multiple facets to this move, which I think on balance is counterproductive if the Iberians wish to remain in the Euro area.

However, there has been no shortage of hysteria among commentators that this is a naked "bet" against the U.S. dollar as the Iberians prudently place assets into financial obligations that will depreciate over time.

Quite the contrary. This is a symbolic gesture to the international investment community. The currency risk is very, very likely (99.99%) going to be fully hedged with currency swaps and/or futures contracts. Any additional rate risk from unsubscribed issue will also be hedged.

However, it is ALSO about appeasement to any future IMF SDR or similar liquidity facility. The IMF is "heavily" influenced by U.S. policy and to the extent these countries can pay tribute to the U.S. by increasing dollar hegemony at the margin this creates goodwill.

The confidence crisis in the Euro this creates is obvious, and is one of the remaining few bargaining chips the satellite countries have to force the hand of the core EU countries.

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