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2013 risk repricing to be feared since last one in 2009 caused sovereign debt crisis

Over the American thanksgiving holiday three years ago in 2009, the relatively small sovereign-linked debtor Dubai World announced it would suspend payments on its debt obligations. Dubai World was a state-owned conglomerate in the emirate of Dubai, part of the United Arab Emirates, and at that time, a locus of serious property overbuilding. This event had a butterfly effect in the debt markets as it caused a tumultuous correction in the pricing of sovereign risk that ushured in a sovereign debt crisis worldwide. Now some investors are talking about 2013 as if there will be another risk repricing. Here are my thoughts on this possibility.

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So if 2013 does see the US go over the fiscal cliff, the economy would stall and recession is the likely outcome. Even in a clifflet scenario, recession is possible. But this is simply not enough to cause a risk repricing. We would need a trigger event like Dubai World. Something like a student loan asset-backed security default to trigger a flight from risk assets and a general repricing of risk. Moreover, even as risk reprices, Treasuries will remain the risk-free asset and so while policy rates will remain at zero, expectations for future policy rates will ratchet down and long-term gvernment bond yields will come down accordingly.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.