So say BNP Paribas analysts, at least:
The cost of bailouts or guarantees by the sovereigns (on both sides of the Atlantic) is becoming more evident via the degradation of their creditworthiness (see charts attached). Sovereigns are taking on an increasing amount of private liabilities, the cost of which will ultimately be borne by citizens. This will manifest itself via higher funding costs, and will ultimately be paid for via higher taxation. A move away from capitalism towards socialism is also bound to have serious repercussions on growth and budget deficits, none of which is being reflected in equity growth expectations but is certainly to a significant extent priced into credit spreads.
Political posturing and a desire to disengage from what would most definitely be a tax-augmenting measure is one of the reasons, among many, why the US House of Reps voted down the original Tarp earlier this week; Witness the talk of the “socialist bill” among political pundits.
Fast forward a few days, as the House prepares to vote on Tarp 2, and money markets continue their collapse. The amount invested in commercial paper declined by about $95bn last week according to the latest Fed stats (that’s the biggest drop on record). Since Lehman’s bankruptcy, the CP market has shrunk by about $215bn, according to Bank of America.
The fallout from the credit crisis is slowly but surely being brought home to roost in the States, with names like General Electric and AT&T in the US affected. You can bet when companies are no longer able to finance their payrolls due to a lack of short-term funding, the general populace (not just in the US) will be screaming for some form of bailout, capitalist or not. The below chart from analysts at BNP Paribas this morning:
