The papers are full of European leaders calling each other names. Jean Claude Junker called Angela Merkel “un-European” because she rejected his idea of a “Euro”-bond to replace national bonds while she said which bit of “Nein” are you unable to understand. OK she didn’t actually say that. But its what’s she’s thinking. Junker went on to say the German insistence that everyone just has to consolidate their budgets is ‘somewhat simplisitc’ and shows Germany is no longer interested in a common solution that helps everyone. No! Really?
But the name calling is the symptom not the cause. The cause is elsewhere.
Specifically Germany had a THIRD FAILED bond auction yesterday. Three in a row is very bad news indeed. This is why Merkel is in a panic. This plus the hideous ramp up in Germany’s borrowing costs. Basically the big, burning eye atop the bond market tower turned it’s baleful gaze from Ireland and Spain to Germany and the US.
This was NOT in the script and the politicians had a brown trouser moment.
Don’t get me wrong, Germany is still selling its debt. And what it pays is still low compared to others BUT the trend is inexorably UP while ‘periphery’ nations, while their costs are still very high have been coming down. This means one thing – that the bond market players are now looking seriously at the sheer size of the debt that would collapse on to Germany, if ‘Europe’ does try to bail out not only Ireland but then Portugal and Spain. And make no mistake, everyone in the markets is now convinced that neither Portugal nor Spain will be able to deliver the necessary fantasy concoction of growth and austerity. It was always a fatuous promise but politicians were so terribly keen to believe it and even more keen that we should too, that they repeated it so often they almost fooled themselves. Nevertheless it was never anything but a lie. And the lie has worn thin.
The German bond auction tried to sell €5 billion. In the event they could only sell €4.33. Which doesn’t sound so very, very bad until you look a little closer and see that the Bundesbank retained/bought €995 million of it themselves. 20% of everything ‘sold’ was sold to themselves. And had they not done so then it would have looked as bad as it was.
Suddenly no one wants German debt. Not until they know if Germany is going to bail everyone out and explode their own debt level, or if they raise the draw bridge in watch as Europe catches fire. Either way the bond market is nervous. There are HUGE profits to be made calling it correctly and speculating on the right side of the line. ENORMOUS losses to be suffered if you bet wrong.
We are rapidly coming to the point where those who are going to be saved are going to have to stand apart from those who are not. A sort of European Rapture – Where the Born Again Financial Fundamentalist, the True Believers, those who Mammon has smiled upon, are saved and taken up bodily to a better place while the unloved and the damned are left behind to make their cursed lives alone.
And importantly it is not just Europe. As I mentioned the bond market’s eye fell also on America. On Monday Mr Obama ‘compromised’ in the way they do in Washington and agreed to an extension of tax breaks for the very rich as the blood money for extending unemployment benefits for the poor. The result of the two combined is to increase US debt by about another trillion dollars and push debt to GDP to about 110%. Entirely predictably the bond market pushed up the price it demanded for buying US debt by 0.35% this week. Which in Bond world is a shocking rise, especially for US debt.
Of course there are two interpretations of this rise. One is that investors are simply betting all this extra, extra lose money will stimulate the economy to grow and grow – the rose tinted Fed-glasses view, or the view that this is the bond market taking fright at the US crossing the event horizon of the debt death spiral.
As David Bloom, Currency Chief at HSBC said in Ambrose Evans-Pritchards’s piece,
“If this is all about growth, that’s brilliant. But if yields are rising because people think America’s fiscal situation is unsustainable, then its Armageddon,…”
The “Armageddon” word is the worry here. Because that is exactly what it will be when our collective bluff of printing of more and more debt is finally called by those who we are trying to sell it to – each other. At some point someone is going to chicken out and say not me. I want out. Pull up the draw bridge and hope for the best.
And lastly, I want to return to my old favourite Japan. but I’ll do it the next post.