The results of the Greek Debt Swap recorded an 86% voluntary tender rate. In their wisdom, the Greeks forced non-tenders to take the package as well. We think that most Asian and Middle Eastern Sovereign reserves managers must have tendered, for no other reason than to avoid publicity. Altruism does not play a part.
Greece has shut itself off from the capital markets for decades. The EU has also damaged its reputation. The Deputy Governor of the PBOC (which controls USD 3T) on Monday said that China will still invest in European bonds, however he winced when he spat out those words. Expect lower official demand for EU government bonds…
So where does the money go now? The PBOC’s Deputy Governor highlighted Japan as a favoured government bond market going forward. With the Old World (read the EU and the US) mired in government consumption induced debt, the safer credits are to be found in Asia and the ‘Emerging Markets’. The problem is that, with the exception of Japan, these countries have such strong balance sheets that there is hardly enough government bonds to go round. By default, the big reserves managers are going to have to buy real assets (equities, property, natural resources) instead of bonds.
Hitherto, Sovereign purchases of real assets had been a somewhat controversial choice. Now its a necessity. The EU debt crisis could well be the catalyst for the next big bull market in Asia and the Emerging Markets.