‘It’s finally here, It’s finally here, Oh, Oh, Oh, They Called me Pig, When I was a baby, I was so happy, I played with my friends in the mud’ (Weezer – 2008).
With QE2 out in the open the debt market seems to have shifted it’s attention back to the perils in Europe’s peripheral countries, the so called PIIGS. PIIGS stands for Portugal, Ireland, Italy, Greece and Spain (the acronym obviously not ordered by economic weakness). Back in the spring of this year when Greece almost collapsed under the weight of their immense budget deficit the EU had to come to their rescue. Yields on the 10 year Greek bonds had passed 12% while the yield on the shorter 2 year maturity had even surpassed 18%! The EU and IMF put together a hefty 600 billion Euro rescue package which brought back some relative calm to the markets.
With the unveiling of a renewed stimulus package in the US, rates in the PIIGS shot up again. Probably on the one hand because a weakening of the $ will mean less economic growth in the already fragile export-driven euro zone, while on the other hand Spain is exhibiting weaker than expected growth, Portugal and Ireland are having troubles getting their budget for 2011 in order, while strikes against pension and other budgetary reforms broke out all over Europe.
Germany in the mean time reiterated their stance to ‘not bail out’ anymore countries should they come begging for money. According to Markel and Schaeubele, it is time for bondholders to take a haircut, in other words: the buck stops here, partial default of euro countries is now an option. Germany can’t and won’t shoulder any more of the financial problems created by lax fiscal policies and corruption in the outer euro zone countries.
An illustration of how bad the situation on the European debt markets is right now can be seen from the following graphs displaying the spread between PIGS 10 year yield and Germany’s 10 year long bond yield:
As you can see yields in Greece and Spain have almost reached pre-spring-crisis levels, while the situation in Portugal and Ireland (the 2 countries that are having trouble with their budgets for the coming year) has dramatically deteriorated, with yield at new all-euro-time highs.
On the shorter end of the yield curve the movement has also been on the upside, with the spread on Irish-German bonds reaching a new all time high:
Both the Irish and the Portuguese can stay away from the capital markets until Q2 2011, but then they will have to start raising fresh money at some point.
Budget deadline in Ireland is December 7th. Something new to look forward to!
In the mean time ….
Happy Hunting & Let’s Be Careful out there!!!
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