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Europe unravels – At the Centre

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.

5 Responses to Europe unravels – At the Centre

  1. Uncle December 9, 2010 at 4:44 pm #

    Great, so we have bailed out all the rich folk by selling our childrens' future earnings and the whole financial system is STILL going to fall apart.

    Do we get our money back now?

    Don't worry – I know the answer…

  2. jonathan December 9, 2010 at 4:48 pm #

    Looking at the chart in your post about Japan, it strikes me that the UK may be amongst the chosen elect to be saved.

    I must say I'm enjoying this Revelations flavour – Armageddon, the Rapture. Isn't the EU itself supposed to be some manifestation of the Beast according to end-of-days enthusiasts? I'm genuinely surprised that there hasn't been more rhetoric along this lines coming from the Christian fundamentalists in the US.

    I did see some survey which claimed that a surprisingly large % of Americans believed financial collapse was a Divine punishment. What for I'm not sure – probably not being free market enough or something……..

  3. Unclear December 9, 2010 at 5:09 pm #

    Yup Jonathan, that's exactly what it is: Divine punishment for not being free market enough. The capitalist Gods are very displeased. American high priests of finance have been worshipping at the altar of Fraud, Money Printing and Bailouts.

  4. Fungus FitzJuggler III December 10, 2010 at 4:14 am #

    You are correct in your analysis. Your predictions may come to pass. But they may not.
    The NWO is clearly on the table?
    What effect will the extinction of external debt, it all becomes internal for those elected, have upon your scenario?
    Will we need a war?
    Or will their attempts to reignite inflation come to pass? The extiction of debt will then take decades but will come about.
    What role will China play in this scenario? A new manufacturing age will dawn in a decade or so. China will then lose out to the extreme quality products. They have certainly taken the hook. While they may make the grade, adding malamine is way too crude for them to even deserve to survive. Inm the meantime we all benefit from their labour and pollution.

  5. Golem XIV - Thoughts December 10, 2010 at 9:39 am #

    Fungus FitzJuggler III,

    good questions to which I woiuld love to have all the answers. But you know I don't. All I can say is let us think about them here betwen us.

    It has been my opinion from the start of this debacle that their plan will not work and will fall over. Because I felt this was true, I have been bitterly against throwing yet more of our future taxes in to a doomed and immiral project. But they have. WHich will just make teh pain of failure all the greater and more bitter.

    I, like you, now belive they know they will fail but are committed to keeping this 'make the people pay' policy going for as long as possible so the wealthy poclet as much as possible before it all burns down.

    Cynical and criminal. The longer this goes on the more serious the crime they are perpetrating and the more terrible the retribution they should expect.

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