Eurobank Worries Back to the Fore

The end of the US summer holiday period is upon us, and with it, a return to reality. The markets are again concerned re Eurobanks, as the fears registered in EU periphery country bond spreads are now registering with investors in other markets. Per Bloomberg:

The gaps between 10- year German bond yields and those of Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to the widest since May.

“Widening spreads are like a canary in a coal mine,” said Quincy Krosby, chief market strategist for Newark, New Jersey- based Prudential Financial Inc., which oversees $690 billion. “It’s a signal that debt concerns are mounting. In order for the stock market to move higher, investors will have to see a solid package of data suggesting that we’re avoiding a double- dip recession.”

Gold has traded up to $1258 an ounce, near its recent highs but the euro is still within its recent 1.27 to the dollar trading range. The big impetus for the gold spike earlier this year had been European investors selling euros to buy gold. That may revive if rattled nerves and with it, funding stress rises, but it is also possible that investors may look to a more diverse menu of “safety” trades this go round.

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  1. Ignacio

    Dear Yves,

    You recently quoted Munchau saying that the program in Greece on fiscal consolidation was doing very well. Better than expected. Watching news about spread widening it looks increasingly clear that the problem is NOT fiscal consolidation but growth perspectives. It looks like the medicine prescribed by the doctor is doing more pain than anything. This also applies to Ireland.

    How long will we have to wait until the ECB does what is unavoidable: QE-public debt edition?

    1. Diego Méndez


      I think Munchau meant Greece was actually reducing its budget deficit. In fact, faster than planned.

      I have some Greek relatives, and I must admit there were many badly needed budget reforms, e.g. most self-employed professionals paid almost no taxes.

      If taxing them (along with other reforms) meant having Greece paralysed through trade and professional unions, which reflects on lower GDP in the short term, then it’s fine with me. The Greek government is doing a good job.

  2. charles

    The ECB broke the book and is having to break the book
    again seemingly from market rumours buying European periphery’s sovereign’s. Finance ministers in Europe
    just have to live up to the perspective of a ‘sovereign default’or ‘debt restructuring’. British QE brought CPI
    over 3%, imho the ECB will soon have to contend instead with
    the uncomfortable ‘debt-deflation’ couple

  3. Tortoise

    The euro AND, to a lesser extent, the dollar are overvalued. Egad, how many times must one say it? I am sure they will drop at some point but when? Perhaps after a lot of damage has been done to the real economy.

  4. Jim Haygood

    The ECB must be experiencing the same ‘pushing on a string’ sensation as Bernanke, as it tries to use lending to push bond spreads back down. Kind of like trying to steer your car by adjusting tire pressures on the run — it’s awfully indirect, and you’re likely to swerve into a ditch long before getting the hang of it.

    But the great convergence trade in euro sovereigns has blown up, and Humpty Dumpty can’t be put back together again.

    Decades ago, Robert Triffin pointed out the fundamental contradictions in the US dollar serving as the global reserve currency. I wonder whether he foresaw the similar unbridgeable fissures underlying the euro currency?

  5. PQuincy

    Is it too soon to say that the Keynesians appear to have been right? Government fiscal austerity imposed under fiscal system crisis and deflation conditions leads to depression?

    After all, the Euroepans, led by Germany, did snatch away the punch bowl fast and hard (not the interest-rate punchbowl, which appears to be down to 0% alcohol and therefore not capable of stimulating vital spirits any more, but the remaining drip of high-proof government spending).

    1. Diego Méndez

      I am not sure myself, but an austerian would probably suggest not minding GDP. Too short-termly.

      Austerity is all about restructuring and balancing an economy for long-term growth. Look at trade and budget deficits instead.

      If austerians are right, the US is f**ked up. Trade and budget deficits are soaring. Moreover, you didn’t even get sustained GDP growth.

      I’d rather conclude any policies imposed under a huge crisis lead to depression.

    2. traderjoe

      Noooo. First Keynes suggested government spending during recessions, and SURPLUS during booms. The NEO-Keynesians have deficit spent in ALL circumstances. Greece got to 100% Debt/GDP by lying on their statistics and running deficits throughout.

      Greece would have defaulted if not for the EU bailout (it will still have to default, maybe within months). So, they really were painted into a corner. More spending would not have been financed by the bond market (Greek ten-year yields are at 11% even now). And austerity does lead further to a Depression. See their unemployment rates? The PMI lately?

      Neo-Keynesianism is a trap. Once there (mal-investment , structural inefficiencies, deficits, debts), the only solution is to default and restructure the economy. No fun. Don’t worry, we’ll be there soon enough…

  6. Doug Terpstra

    The Pragmatic Capitalist links to a WSJ article on the validity of the European stress tests:


    Quelle surprise: “Their findings were alarming to say the least. Upon close inspection, they found that the stress tests severely underestimated the levels of debt the banks were holding:”

    “…Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held —–facts that neither regulators nor most banks disclosed when the test results were published in late July.”

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