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Jonathan Hoenig - Rate Spike Puts PIGS in 'Rollover' Moment



March 31, 2011 – Comments (0)

You probably don't remember "Rollover," the 1981 financial thriller starring Jane Fonda in which a mass withdrawal from America's banks by Middle Eastern Arabs causes a crash in the dollar and a global economic collapse.

However hackneyed, the storyline is not so far-fetched. The word "credit" is derived from the Latin root credere, or "to believe." As depositors, investors and lenders, we trust borrowers only to the extent we believe they will actually pay us back. The higher the risk, the higher the interest rate must be.

The higher interest rates demanded by investors in economically unsound countries, known as bond "vigilantism," are simply a reality check. That's why the recent spike in yields for Europe's heavily indebted "PIGS" (Portugal, Ireland, Greece and Spain) serves as a worthy indicator, and warning sign, of what happens when markets no longer believe in a country's creditworthiness.

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