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National Review Online


A Slap Upside the Head of the Government

March 23, 2010

By Nicole Gelinas

There’s a phrase for the phenomenon that Daniel described earlier today. When a corporation can issue debt at a cheaper rate than can its home government, it’s called “piercing the sovereign ceiling.”

Companies that “pierce the sovereign ceiling” are usually firms that, though based in the third world, generate ample foreign-currency revenue through their international operations, thus somewhat insulating themselves from home-government risks such as inflation and expropriation.

Berkshire Hathaway, Procter & Gamble, and Johnson & Johnson, three of the four U.S.-based companies that Daniel mentioned as having been able to issue debt recently at cheaper rates than the U.S. government could, certainly fit that bill. All do a great deal of business abroad. By doing so, they diversify themselves away from U.S. government policies.

Piercing the sovereign ceiling is an invigorating example of how markets, against all odds, can fight government to fix the imbalances that government has created in its rescues of financial firms.

How? A too-big-to-fail financial company such as Citigroup, AIG, or even Goldman Sachs could never, ever pierce the sovereign ceiling. Why not? Potential bondholders in suchcompanies know that these firms ultimately depend on the ability and willingness of the American government to bail them out in the next financial crisis.

These financial companies are only as strong as the U.S. government. Perversely, though, a permanent “too big to fail” policy weakens the U.S. government — since the feds can only borrow and implicitly guarantee so much — and weakens, too, the financial companies that depend on it.

As this fact has become painfully apparent, non-financial firms have a distinct new advantage in the debt markets, as the recent ceiling-piercers show.

Being “too big to fail” may be a liability now in global debt markets. Decades’ worth of “too big to fail” policy has created a federal government that is becoming “too weak to bail” out the financial industry the next time around.

Meanwhile, markets believe to some degree that companies such as Berkshire and P&G can stand on their own two feet, regardless of whether the U.S. government’s finances weaken further.

The tables are turned. Once, financial firms had an advantage over the rest of the economy because of their access to government coffers. But now, investors are starting to think that the value of that access is diminishing.

Markets 1, government 0.

Original Source:



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