Eyes fixed on the policymakers

Policymakers are still running the bond market

“I used to think that if there was reincarnation, I wanted to come back as President or the Pope... But now I would like to come back as the bond market. You can intimidate everybody.”  James Carville, Former advisor to President Clinton.

For a long time, James Carville’s line has been one of our favourite financial market quotes. The idea behind the comment is that the bond market imposes constraints on poor government, particularly with regards to fiscal management. Governments need to finance their activities and to do so, the buyers of government debt will want to see credible fiscal policies. This concept played out dramatically in Europe over the last few years, with Greece the most notable amongst a group of nations where government bond yields surged higher due to deterioration in the fiscal position.

Indeed, in Europe, the primary focus of the policy debate has been around the connected issues of economic growth and fiscal management. The bond market punished countries that seemed unwilling to embark on some sort of austerity program, provided that austerity didn’t put unacceptable stress on the economy and society in the short term.