California and the Euro

The WSJ had an interesting comment this morning comparing the bond spread on California bonds versus bonds from Greece. They concluded that the widening spread on bonds from Greece suggests that California is in better shape. The market measures these things in an instrument called a "credit default swap" where the market insures against a default by selling a risk instrument. California has four of those contracts out on its bonds today, Greece has 3136.

Currently the bond markets are charging a premium for California to issue debt - about 2% above the yield on Treasury bills (considered the safest bond investment). Greek bonds now are about 4.4% above the comparable German bond (which in the case of the Euro is the safe bond).

That should not give Californians much solace. As America piles on deficits (not to the heights of Greece but close) - Greece is now at 12.7% of GDP. (The US at this point is above 10%.) What is interesting to me about this exercise is the relative value of the Euro. Greece is a small part of the Euro zone monetary regime. But it is not the only example of fiscal irresponsibility. For example the Spanish deficit, under the mismanagement of the Zapatero regime is at about 11.4%. Portugal is close to 9%. Italy's debt also puts it in the stratosphere. The group in trouble is sometimes referred to as the PIIGS (Portugal, Italy, Ireland, Greece and Spain). The Euro Zone was supposed to keep all its members below 3% deficits. Given the condition of many of its members one would think that the value of the Euro would be dropping like a stone. What seems to be saving it is the performance of the rest of us including the US.