Tuesday, June 8, 2010

PIIGS Yields Soar to New Highs as the ECB Bailout Fails

Hmmm....Now this is interesting. From the FT: It appears the 750 billion Euro bailout is beginning to fail:

Some excerpts from the article:

"In the past week – with the exception of Germany – yields of eurozone countries have risen sharply, with some analysts warning that the euro itself may not survive the Continent’s public debt crisis.

The jump in yields has sparked growing criticism of the ECB for its apparent lack of conviction over purchasing government bonds.

Last week, it bought only €5.5bn in bonds, which many investors say explains why yields are moving higher again.

This compares with the €16.5bn, €10bn and €8.5bn bought in the first three weeks of the programme.

The ECB has bought a total of €40.5bn.

Harvinder Sian, senior European rates strategist at Royal Bank of Scotland, says: “The ECB is not buying enough bonds, its governing council appears to be split over the programme while the debt problems of Greece, Spain and Portugal are far from resolved.

“Beyond that, European policymakers in Germany appear reluctant to show their complete support for the peripheral markets.

“This has led to more instability in the eurozone and more questions about whether the euro as a project can survive.”

Ralf Preusser, head of European rates research at BofA Merrill Lynch Global Research, adds: “We are at a critical stage for the eurozone. There are very few buyers of eurozone bonds, except for the most liquid markets."

My Take:

The outlook in Europe continues to rapidly deteriorate. Folks, this is getting ugly and extremely political which is making matters worse.

The way I see it, the ECB is buying less and less debt each week because the prudent countries like Germany resent the hell out of being forced to bailout the PIIGS.

The large majority of the people in Germany also feel the same way. This puts tremendous political pressure on the policitians in Germany to back away from this bailout.

As you can see above, it appears that the ECB seems to be backing away from this program. Perhaps we just saw a central bank actually listen to the people for once?

If you look at the numbers the answer is yes: The ECB only bought $5 billion in debt last week which was the fourth consecutive weekly drop in ECB debt purchases.

As a result, yields on some of the PIIGS like Italy and Spain are now higher than they were BEFORE the ECB announced the bailout.

Traders are now screaming for the ECB to pick up their purchase rates and the ECB has responded by moving in the opposite direction.

This trend has obviously totally spooked the bond markets, and they have responded by not wanting to touch any of the PIIG debt which is why yields are now soaring once again.

Can you blame them for backing away?

I mean all of these countries are insolvent and on the brink of default. The consequences of 30 years of debt can kicking that was done while everyone fed off the government teet are now coming home to roost.

The Bottom Line

I don't see how Europe can stop this debt contagion. The political will to step up and throw money out of helicopters via QE appears to not be there.

Word is Germany basically told Geithner and Bernanke to go pound sand at the G-20 when they advised Germany to spend like drunken sailors via QE/Bailouts. Europe obviously sees that this isn't a long term solution.

Unlike our narcissists that run the Fed, the ECB realizes the only real solution is to pay down debt or default on it and take the medicine that we refuse to accept.

With the ECB apparently unwilling to go along with this charade I see no reason why any potential buyer would touch the PIIGS debt.

Who on earth would risk buying any PIIG debt knowing that the ECB is not fully committed to backing the program?

The bottom line is here is at the end of the day there will be no buyers without a complete reversal in policy by the ECB. The chances of this happening are between slim and none.

The situation appears to be unfixable and the Euro is in serious jeopardy as a result.

Keep an eye on the rapidly spreading debt contagion, and get out of equity positions if we see a bounce here.

You know its time to sell when the CNBC puppets start raising cash:


getyourselfconnected said...

The Swiss intervention in the Euro was funny the past few days. Billions used and no progress. That is going to blow up soon.

Jeff said...


Yeah I saw that.

Central Bankers Gone Wild!

Gotta love it. Futes just took a nice quick dump. Wonder what triggered that?

flipdippy said...

I have no idea if I'm saying something which has already been stated, but maybe we should go from swine to fruit - from PIIGS to FIGS (or PHIIGS for those who prefer better grammar).

This is it - before the 4th of July, we find out if these current events are the stress which break the western civilized world.

Honestly here Jeff - do you think it is? Or do you just see the potential for it?

I hope we aren't there yet, these are strange times and quite honestly, I don't think people are ready.

jeff said...


It's hard to time this stuff but I think we are on the brink of a large economic event.

The risk of a collapse is as high right now as I have ever seen it.

Is it possible they have a trump card that they haven't played yet? I guess it's possible but I don't know what it could be.

IMO, they have thrown everything at this credit bubble and nothing has worked.

The only option left IMO is to let it pop and then deal with the consequences.

If they don't then hyperinflation gets put on the table which opens up another huge can of worms.

I agree with you. People are not ready and we better stop spending like drunken sailors because we are going to need money to help support the bagholders who are left with nothing when this thing collapses.

I hope we aren't there yet either. In fact I hope it never happens.

Realictically though its unavoidable at this point. The timing of it is the hardest part.

Scary times my friend.

Anonymous said...

"I don't see how Europe can stop this debt contagion. The political will to step up and throw money out of helicopters via QE appears to not be there."

Very true. The official word out of europe is we will bail out everyone - we will print as much as needed - we will do whatever it takes.

Problem is, thats all talk. Their actions (lack of buying bonds, infighting, cultural differences, etc) tell an entirely different story.

The bond market sees this and is calling their bluff.

Jeffrey said...



Thats how I see it too.