We might have Aegean Contagion Part Deux on our hands. All is not well on your Uncle Eddie's side of the pond. Ireland draws closer to a full scale bailout by the day. Portugal is signalling that they're not far behind. And Greece is in the news once again, having to restate their projected deficit figures and admit that they're going to miss their targeted deficit reduction goal. By a lot.
While Greece won't require another bailout (at least for the time being), a combined bailout of Ireland and Portugal may take as much as €200 billion, which would all but wipe out the bailout fund established the ECB and IMF back in March. Strap in, kids, it's gonna be a bumpy ride.
Traders looking for the next easy target have cast their gaze upon France, driving the spread between French and German 10-year bonds up by 50 basis points. It now costs more to insure a French bond than those of Chile and Malaysia.
“I’ve never liked the liability profile of France because of its over-reliance on shorter maturities,” said Louis Gargour, chief investment officer at LNG Capital LLP, a London- based hedge fund he co-founded in 2006. “If deficits rise or borrowing costs increase, that debt becomes more difficult to refinance.”
These factors may present an even more difficult challenge to the Euro than the eventual Greek rescue in May. Midas and I debated the fate of the Euro, and I still believe that there will be a mechanism in place to eject errant Eurozone members in the next 36 months. But that's not going to do a lot of good if half the Eurozone countries are against the ropes in that same time frame.
Any government bond traders who'd like to give some insight into what we can expect, I think we'd all appreciate it. Is the Euro actually toast this time?
Don't worry about the IMF fund, the US will just issue more bonds, which the Fed will buy, and the IMF "emergency reserves" will increase and Ireland/Portugal will find relief. I think the more important issue that you touch on is the spread to the core via France. That will get ugly. Germany has been surprisingly quiet in the face of the Ireland bailout talks.
Eddie, does anyone outside of academia in Europe think gold is in a bubble? I'm hoping this is the explosion of the bond market in its current size and form and some global restructuring occurs where bondholders actually take a haircut and taxpayers are not 100% on the hook.
Well, Soros has been calling it a bubble all year, but he's not willing to bet against it yet. He has been paring back his position, though. Hedge funds have been plowing money into it all year:
http://93rockon.com/news/articles/2010/nov/15/more-top-hedge-fund-manag…
This goes part of the way to explaining why the hedgies love it: http://www.cnbc.com/id/39345521/Johnson_The_Hedge_Funds_are_Buying_Gold…
Keep in mind that, adjusted for inflation, gold would have to double from today's price to even approach the 1980 high. And gold is all about hedging inflation.
What Soros is saying to me is "all bull markets come to an end". Until the price of money increases (interest rates rise), gold will continue to reflect the devaluation of fiat currencies.
The moral hazard in the Eurozone is immense. Who really thinks the political leaders of these socialist states will have the courage to embrace austerity, defy the large public sector unions rioting and then get annihilated in the next election?
Let's just say the Germans won't be happy when the PIGS eat all their sauerkraut.
Ireland is going to be bailed out but the interest on the loan will be killer (I've heard 5 percent). Given that the growth rate of Ireland is mired in 2 percent for the foreseeable future it is not unlikely that Ireland won't even be able to repay the loan as their economy can't grow it's way out of the obligation.
I think the Euro has peaked for the time being, and will begin a downtrend vs. $ that will retest June lows.
As for my long-term outlook, I think either one of two things needs to happen: either further unification or disintegration (I forget both of your positions from NSFW but I think you may have mentioned this). The status quo will not suffice. The Europeans think they can pick and choose which things to unify and which to separate. They want a monetary and diplomatic union, but they want individual sovereignty for their political, fiscal, and cultural systems. This just can't work in the long run.
Austria announced today that you are 100% spot on
=http://www.forbes.com/feeds/ap/2010/11/16/business-eu-austria-greece-fi…
I heartily agree with everything LIBOR said. I'm inclined to side with Soros on the gold being a bubble thing. While we are far from the 1980 peak, that was several standard deviations away from the mean and I don't think we need to retest those highs in real terms to be in a bubble. However, the inflection point will probably come after rates are raised as Capitalist said.
In any case, I hope I can get on an FX desk before the euro zone blows up.
Is Spain looking in the clear?
Portugal and Ireland are ok, but when its Spain's turn than all hell will break loose I think. Hope winning the world cup meant that their economy was "boosted"
Interesting..from what I've read Spain seems to be the safest.
Also, I remember reading after the World Cup that winners usually see a .5% increase in GDP over what it would have been without the win. Probably just a one-term thing though.
Qui dolore pariatur assumenda nulla consequatur alias assumenda rerum. Necessitatibus voluptas aut voluptatem et repudiandae. Et et est corrupti eligendi suscipit soluta eos.
Non tenetur tempore aut magnam unde. Nam culpa qui sint laudantium. Quibusdam sunt rerum quia officia ab.
Asperiores quibusdam molestiae quos nobis officia optio. Fugiat rerum expedita velit reprehenderit. Eum quis deserunt aut magnam molestiae dolorem.
Laborum cupiditate qui deleniti ut et possimus. Ut esse omnis non laudantium et ipsam dolores. Soluta est soluta corporis eius tempora repellendus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...