Joseph Cotterill over at FT Aphaville has a great post on how some European corporate bonds are trading through their sovereigns.   Not surprising it taking place in countries without access to a printing press to monetize deficit spending,

Markit pointed out something interesting on Monday: there’s a record spread between their iTraxx Europe and SovX Western Europe CDS indices.

SovX WE — which is filled with such wholesome sovereign goodness as Portugal and Ireland — has obviously had a few down days recently, on account of renewed troubles within its weakest members.

Not to mention possible EU treaty changes on deficit control that might favour sovereign debt restructuring in the long run. ECB board member Lorenzo Bini Smaghi seemed less than cheerful on the changes’ ability to force fiscal reform in a speech made on Monday, so there’s one to watch.

This phase of the new sovereign debt crisis is quite different than what we experienced in the 1980’s LDC Debt Crisis and 1997 Asian Financial Crisis, which were mainly the result of balance of payments problems.  That is, sovereign debtors did not have adequate access to foreign exchange to service their hard currency external debt.

During the 1980’s, the heavily indebted countries were forced to monetize their fiscal imbalances and maintain weak currencies.  This continued even after some countries declared debt moratoriums and stopped interest payments.

The PIIGS of Europe are in a much different situation after their loss of market access to financing.  The brunt of the adjustment falls on public spending reductions, which increases “adjustment fatigue” where the country grows weary of austerity.

Sovereign credit risk includes not only a government’s ability to pay, but also its willingness to pay.  There is no doubt the EU is ready to back-stop the PIIGS so ability to pay is not an issue.   The question is, and one which the markets are wrestling with, will they do so if the fiscal adjustment becomes politically unsustainable?  Stay tuned.