Ecomony of Jersey: Heavily invested in the bond bubble

Jersey is heavily exposed to the bond market according to Senator Ozouf, the paltry 9.17% return on Jersey's fund of funds, which would have been 30%+ had the fund simply bought gold instead, is riding the largest bubble in history — government bonds or sovereign debt.

Capital is seeking security in bonds
But bonds are not particularly secure
One nation after another crashes
Jersey's reserves are in that market

Jersey has about £1.3 billion which would meet government expenditure for about two years, but this includes the Social Security and employee pension funds.

Imagine this scenario: A major government has been forever borrowing from Peter to pay Paul, never lifting a finger to cut its deficits.

Suddenly, global investors pull the plug. They dump the government's bonds like a hot potato. They drive bond prices into the gutter and make it impossible for the government to borrow another cent without paying sky-high, budget-busting interest rates.

To persuade investors to resume buying its bonds, the government is eventually forced to pass draconian austerity measures — mass layoffs of police and other public employees, deep cuts in pensions and health benefits, plus tax hikes across the board.

Result: mass protests, riots and national strikes, another big blow to the economy, a new exodus by investors and louder demands for even greater cutbacks or taxes.

Sound familiar? It should, because that's precisely what we've just witnessed in Greece. Meanwhile, Italy is heading down the same path, passing draconian austerity measures just this weekend.

Sure, global investors rejoiced. But even while Rome was performing emergency surgery, the European debt cancer had metastasised to an even larger economy — France, the next likely victim of the debt contagion.

Suddenly, French bonds had plunged and suddenly the interest premium the French government would have to pay for 10-year money (compared to the German government) had surged to 168 basis points (1.68 percentage points). What's worse, the cost of insuring French government debt against default had also gone through the roof.

To help understand exactly what this means, let's say you've been buying French government bonds for yield and safety. To protect yourself against a future default, you can buy insurance in the form of a credit default swap.

As with any insurance, if the risk of failure is low your premium cost will be low; if the risk surges, your cost will surge. That's precisely what we've just seen happen with the default insurance premiums on French government bonds.

Right now, to insure $10 million in five-year French government bonds against default, investors would have to pay $203,001 in yearly premiums. That's double the peak level during the debt crisis of 2009 and triple the peak of 2008.

How bad is that? Consider these facts.

Fact #1. Three years earlier, when the Greek debt crisis first emerged, equivalent insurance against Greek default cost only $174,761. According to the market for default insurance, French bonds had therefore become riskier than Greek bonds were at the onset of Greece's crisis.

Taken in isolation, were French government finances weaker than Greece's had been? Perhaps not. But its banks were considerably weaker. The markets were pricing in those wider risks.

Fact #2. S&P, Moody's and Fitch continued to rate France AAA despite the market signals, suggesting a significant disconnect between market pricing and agency ratings.

Fact #3. Moody's own published analysis of Greek debt demonstrated that the market had recognised the deterioration long before the ratings agencies acknowledged it.

Fact #4. S&P briefly issued a notice suggesting France's AAA rating was under review before describing the publication as an error.

Fact #5. The major ratings agencies are paid by the very organisations whose debt they rate, creating an obvious conflict of interest.

Fact #6. Weiss Ratings, which did not accept payment from issuers, rated France considerably lower than the established agencies, arguing that France's banking exposure and fiscal commitments justified a more cautious assessment.

Fact #7. France's economy was more than eight times larger than Greece's. Consequently, any sovereign debt crisis affecting France would likely have far greater implications for the global financial system.

Meanwhile, speculation continued to grow that Germany might ultimately leave the euro and reintroduce the Deutsche Mark at the original conversion rate.

Listening carefully to what was being said by Angela Merkel and the German Finance Minister, they refused to rule out any solution and were examining every possible outcome. The bailout discussions increasingly appeared to be about protecting domestic German banks rather than simply assisting other eurozone governments.

Germany ruled out jointly issued European bonds and resisted allowing the European Central Bank simply to print money to resolve the crisis. Their stated concern remained long-term price stability.

The possibility of a German withdrawal from the euro therefore remained a subject of considerable speculation. Europe appeared to have at least one more sovereign debt crisis ahead of it. Time would tell whether Jersey's new Social Security Minister adjusted the island's investment strategy accordingly.

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Last updated: 31 July 2026