Thursday, March 10, 2011

Is This Europe's Month of Reckoning?

Interest rate spreads on European sovereign debt jumped to new levels yesterday. On 10-year bonds, Greek debt rose to 942 basis points over German bonds of the same maturity. Portugal rose to 436 basis points over the German yields and Spain jumped back up to over 200 basis points.

Is something on the horizon?

A lot it seems. See my earlier post, “Meanwhile Back In Europe” (

The new round of stress tests began on European banks last weekend. And,ever since they started the tests the bank regulators have had to defend themselves, to defend that the tests WERE NOT too soft!

Not a very good beginning to the upcoming events, is it?

How much confidence are we going to have in the results if the regulators are not even “out of the gate” and their methodology is being questioned? It’s just like the United States government saying it believes in a “strong dollar”.

Then again, how good can the tests be if the banks are changing how they do business right in front of the efforts of the regulators to re-regulate them? All sorts of things are going on, in Europe ( and as well as in the United States, and the regulators still seem to be creating an environment to avoid another 2008 crisis.

Oh, well, what else do regulators have to do to keep themselves busy?

And, the politicians still are on the lookout for “speculators”, those dastardly villains that create havoc for nations that don’t seem to have sufficient discipline to manage their fiscal affairs prudently. There are still a substantial number of member states in the European Union that want to ban the use of “uncovered” credit default swaps on sovereign debt. (See
This will stop the speculators!

Most of the distressed European nations that have experienced problems in the bond markets continue to deny responsibility for creating these sovereign debt problems. And, with unrest continuing or even increasing in these countries, governments face substantial internal pressure to place the blame for their problems “out there”, out where the shady “speculators” gather.

These “shady” speculators have taken the place of those “shadowy” international banks that inhabited the 1980s and caused sovereign nations, like France and Mitterrand for example, such incredible trouble.

Readers of my posts know what I feel about people who claim that their problems are “out there”!

One example of such unrest is that which is taking place in Greece. Adding to this is the fact that the unemployment rate in Greece recently hit a historic high.

In the face of all that is going on Portugal was able to issue new two-year debt on Wednesday, albeit at very expensive rates. Wednesday’s offering was for €1, which means that Portugal has raised almost €7 this year; approximately 35% of the year’s total funding need.

But, even this successful offering does not seem to ease the general concern in international financial markets that the overall political solutions to the problems being faced in the Eurozone are going to be resolved. In addition to the increased spreads in the bond markets, the Euro has fallen off in the last couple of days as the traders have worried that the leaders of the European Union will “pass” on reaching strong enough solutions to stem the lingering crisis.

There are still a lot of “unresolved” issues in the world and the existence of these issues points up the difficulties that people, states, and nations have created for themselves.

In my estimation it has taken Europe (and the United States) fifty years to get into the position it now finds itself. Europe (and the United States) has dug a big hole for itself. In many cases, people, states, and nations have not stopped digging the hole deeper!

In some cases, efforts have been made to stop the digging…and in one, possibly two, cases there have even been efforts to start filling the hole up.

No one seems to be really stepping up to really address the bigger problems…the leaders are nowhere in sight.

The international financial markets are indicating a lack of confidence in what is going on. The “stress” tests are too soft. Nations are still looking backwards to develop regulations. And, the leaders of the European Union are not going to come up with anything effective in their deliberations that begin again this Friday.

Kenneth Rogoff, who co-authored the book “This Time is Different," has recently stated that Greece and Ireland will need to restructure their debts. He also suggested that Spain and Portugal may be forced to do the same thing.

A debt restructure may be the only way to really make something happen. Historically, this is often the only way to get things changed when there is a total void of leadership!

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