June 13, 2011
Latvia and Iceland successfully issued sovereign bonds at yields approaching Spain's last week. There are rumours that Dubai may follow suit. That the countries which started the sovereign debt crisis are returning to the market while peripheral euro-zone sovereigns continue to struggle has led to crowing from those who see austerity as a misguided strategy for Greece, Ireland and Portugal.
The facts certainly suggest that the yoke of a single currency is a barrier to recovery. Iceland’s krona has halved in value since the crisis began, providing a stimulus to exports unavailable to euro-zone governments. Iceland let its banks go bust, whereas Ireland’s decision to stand behind hers led directly to the spike in Irish bond yields. Amid a temporary wobble in its currency peg to the euro, Latvia's government called on foreign banks, which had provided euro-denominated mortgages to Latvians, to accept writedowns. Even Dubai seems to provide a lesson for Ireland in how to deal with its banking debt; while Dubai kept up payments on its official sovereign bonds, it aggressively restructured the private debt of state-owned companies.
The lessons appear to be clear: devalue the currency and wallop foreign creditors to banks, state-owned enterprises and private citizens, honouring only the sovereign’s own obligations. Your reward will be an inversion in credit-default swaps:
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