Will Gold Help Japan Sell Debt?

Earlier this week, Standard & Poor’s placed Germany, France and 13 other Eurozone nations on negative credit watch, saying, "Continuing disagreements among European policy makers on how to tackle" the region’s debt crisis risk is damaging their financial stability. Furthermore, S&P warned that the European Financial Stability Facility (EFSF) may lose its top credit rating. "We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on credit watch, on one or more of EFSF’s guarantor members, S&P explained. Now, more steps are being considered by the European Central Bank in order to stimulate lending.

Credit grades may be lowered by one level for Austria, Belgium, Finland, Germany, the Netherlands, and Luxembourg, and as many as two levels for the other government if the summit does not yield a satisfactory result, S&P said. If S&P does downgrade all the nations, more than $8.1T of government debt would be affected.

Investor Insights: Are Gold and Silver Waiting on Another Catalyst?

In an effort to boost confidence and stimulate lending, the European Central Bank (ECB) may seek to expand the eligibility of collateral for ECB loans by loosening rules regarding the use of asset-backed securities. Bloomberg explains, "The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis." However, other nations are taking other methods to boost confidence into financial markets.

In August, I discussed how Royal Silver Company, in an effort to raise capital, offered bonds that entitled the holder to receive a one-ounce coin of silver each month. The principal was still paid back in cash, but the silver coin acted as interest and even provided a hedge against a devaluing dollar. Apparently, Japan has decided to take a page from Royal Silver’s playbook.

In order to increase demand for government debt, Japanese Finance Minister Jun Azumi will be offering a special incentive for investors that purchase more than 10M yen ($129,000) in reconstruction bonds. Bloomberg reports, "Individual investors who hold the bonds for three years will be eligible for a gold commemorative coin valued at 10,000 yen. At 15.6 grams, (0.55 oz), it would be worth about $948 based on prices for the precious metal. Only a limited number of coins will be issued, the finance ministry said in a statement. Silver coins weighing 31.1 grams, valued at 1,000 yen, will be distributed to those who own more than 1M yen of the bonds, the government said. The coins will be offered for debt going on sale in March." Investors will also receive a thank-you note from the minister.

Considering Japan’s massive debt load, it will take more than 15.6 grams of gold or 31.1 grams of silver to significantly increase government debt demand. In a recent letter to investors, Kyle Bass describes Japan’s dreadful debt situation. He writes, "It is indisputable that Japan has the worst on balance sheet debt burden in the world (roughly 229% of GDP). Japan has the worst debt dynamic (total debt outstanding as a multiple of central government revenues) of any country in the world (at a staggering 20X). They now have more people leaving the workforce than entering. Soon they will have more people dis-saving than saving." While a few grams of precious metals and a thank-you note is a nice gesture, it will not resolve the solvency problems facing Japan or other nations.

Eric McWhinnie, Wall St. Cheat Sheet