• Bloomberg


Japan will be forced to default on its debt, Greece’s economy is “done” and Iceland is worse off than Greece, said J. Kyle Bass, the head of Dallas-based Hayman Advisors LP who made $500 million in 2007 on the U.S. subprime collapse.

Nations around the world will be unable to repay their debt, and financial austerity in a country such as Ireland is “too late,” Bass said Wednesday at the Value Investing Congress in New York.

Japan’s economy may unravel in the next two to three years, and its interest payments will exceed revenue, he said. “Japan can’t fund itself internally,” Bass said.

The country’s year-over-year gross domestic product was 2.4 percent as of June 30. It has the world’s largest public debt, approaching 200 percent of its GDP amid a 5.1 percent jobless rate. Consumer prices fell by 1 percent in September and have been negative each month since May 2009 as deflation has taken hold.

Pricing on Japanese interest rate swaps is the best he’s ever seen, Bass said. Investors could make 50 to 100 times their capital betting on them, he said, calling them a lottery ticket on Japan’s economy.

Japanese bonds have returned 3.3 percent this year, according to Merrill Lynch Indexes, compared with a return of 0.872 percent in 2009.

China took JGB hit

BLOOMBERG Japanese debt isn’t “attractive” to China’s central bank because yields on the securities fall short of the bank’s borrowing costs, Citigroup Inc. said Thursday.

China cut Japanese debt holdings by a net ¥2.02 trillion ($24.5 billion) in August, the Finance Ministry said on Oct. 8. That’s the biggest monthly sale recorded in data going back to 2005. China bought a record ¥735.2 billion of Japanese debt in May and a combined ¥1.04 trillion of the securities in the following two months.

The borrowing cost for the People’s Bank of China is estimated to be 1.2 percent, Osamu Takashima and Issei Suzuki, currency strategists in Tokyo at Citigroup, wrote in a report Wednesday.

The benchmark 10-year Japanese government bond yielded 0.875 percent Thursday.

“With JGB yields below PBOC borrowing costs, yen is not an attractive investment,” the strategists wrote. “These sales confirm our view that the earlier substantial increases in short-term JGB purchases by the PBOC did not represent a strategic shift in reserve allocations and were merely a function of flight to safety flows from euro to yen during the Greek financial crisis.”

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