Sovereign

"Sovereign" is a word you can expect to hear mentioned a lot in 2012 usually followed immediately by "risk" or "default".

We spent 2011 dodging and delaying what appeared to imminent defaults in Europe. Rather than follow the legitimate approach of recognising government insolvencies and the unsustainability of the Euro, European leaders continued to pursue what they perceived as the more morally praise worthly approach of continued bailouts and the potential for greater European fiscal union. This writer however believes, and has always argued that the national solvency issues should be recognised, accepted, and resolved in order to move forward. The "Club Med" nations of the Euro that are hopelessly insolvent should be cut lose fo the Euro and allowed to reorganise their debts and currencies on their own account.

The massive writedowns that need to occur in European banks should be allowed to proceed and if some disappear all the better. Those who have pursued prudent risk and lending policies (if any) will be rewarded; the only proviso I have is that depositors should be guaranteed by the State.

Pressure on government bond pricing has been significant over 2011. Perhaps 2012 is the year when interest rates across the developed finally start to realistically factor in the significant price of sovereign risk.

Whatever happens in Europe will seem like sideshow compared to the economic consequences of the Chinese economy finally discovering the theory of gravity. That remains a dice roll......