The phrase ‘putting lipstick on a pig’ has been used in financial circles for years and it is a phrase that I have used to describe the European debt crisis and the countless attempts by its leaders to convince us that it is “resolved”. However as the crisis continues to escalate it is likely that putting lipstick on these PIIGS may not work much longer.
Contagion reaches the core
Although the acronym PIIGS refers to the nations of Portugal, Ireland, Italy, Greece and Spain, the crisis has now spread well beyond these peripheral nations and is infecting those at its core. France, Austria, Finland and the Netherlands have all seen their borrowing costs rise considerably in recent days as investors lose patience and default risk mounts.
As I mentioned earlier this week, the bond vigilantes are now starting to show up and we are seeing more and more signs of their handiwork. As Hans Redeker, currency chief at Morgan Stanley describes, German Bunds are the latest victim of fearful bond investors: “Until recently, if investors were selling Italian bonds, they would tend to rebalance within the eurozone by buying Bunds. But now they seem to be taking their money out of EMU altogether. US Treasury (TICS) data shows that the money is going into US Treasury bonds as the ultimate safe-haven.” This is a big part of the reason I see the US dollar continuing to rise.
There are also signs that Asian investors are taking profit and backing out of the German bond market. A major concern for holders of Germany’s debt is the €2 trillion that currently sits on the balance sheet of the ECB, but for which Germany will carry the can should the Eurozone break apart.
Market confidence was not helped by Eurozone president Jean-Claude Juncker who gave a newspaper interview stating that “I think that the level of German debt is worrying. Germany has higher debts than Spain – but no one in Germany wants to acknowledge that.”
German Bunds still yield just 1.86% which clearly puts them among the safer-havens, however the fact that contagion has reached Europe’s core adds to the pressure on leaders to act decisively – something that seems unlikely given the number of failed meetings we have seen.
As I see it, leaders either have to go nuclear and boost the EFSF to the extent that it can rescue all the PIIGS, or they that to change the law to allow member nations to leave or be kicked out of the single currency.