Thursday, February 16, 2012

Is Japan next?

Japan's debt levels have ballooned to a level that makes Greece look like a steward of capital. Wall Street has noticed, and it's placing its bets.

FORTUNE -- With the European sovereign debt imbroglio taking a breather for the moment, there is increasing concern on Wall Street that Japan could be the next major flashpoint in the ongoing global financial crisis. It appears that the country's economic reckoning, some 20 years in the making, could finally be coming to a head in the near future as the economy weakens and its debt, relative to its economic output, balloons to a level that makes Greece look like a responsible steward of capital.

Wall Street is buying protection in the form of credit default swaps to prepare for that day Japan implodes. Trading of swaps on Japanese sovereigns has been highly volatile in the past year -- they are currently being sold at around 135 basis points, 100 basis points above Japan's debt yield, credit traders in New York and London tell Fortune. Credit default swaps provide a way for investors to make money in the event of a default. Read More