Tuesday, November 23, 2010

European Debt Contagion Spreading Like Wildfire

Don't be fooled by today folks.  This sell off is not about North Korea.

We have a full blown debt contagion crisis on our hands in Europe as Portugal and Spain enter center stage following the Ireland bailout.

Spain had a short term debt auction that was basically a disaster per FT-Alphaville:

"Spanish 3-month bill auction fail - debt agency sells €3.26bn vs €4-5bn indicated, at avg yield of 1.743% vs 0.951% prior"

Germany's chancellor is warning that the Euro is in trouble per Bloomberg.  Here is another report on some of Merkel's comments per Dow Jones.

"Germany's Merkel: Euro Facing Serious Situation

BERLIN -(Dow Jones)- German Chancellor Angela Merkel Tuesday underlined the grave situation facing the single currency in the wake of the financial woes facing Ireland.

"We're in an extraordinarily serious situation, as far as the situation of the euro is concerned," Merkel said during a speech at the German employers association annual conference.

She labelled the Irish crisis "very worrying" but different from that faced by Greece in spring this year."

My Take:

The spanish debt auction is a disaster folks.  THIS IS SHORT TERM FUNDING.  Yields basically had to double in order to get the auction done.

There are also rumors out there that Portugal is facing a Moody's debt downgrade.

Folks, the Ireland bailout has apparantly lit a fuse that has triggered a debt panic across the pond.  It reminds me of our Lehman weekend.  Went they went down the market immediately started asking: Who's next?

I think we are seeing something similiar over in Europe.

If Spain goes down it's game over.  Their economy is larger than Portugal, Ireland, and Greece combined. The fact that investors demanded a much higher yield on 3 month paper tells me there is no confidence at all in Spain's fiscal situation.

I don't see how there is enough money to bailout Spain given the grave debt situation in Europe.  The money simply isn't there, and they can't print out of this like we can because of the Euro.

North Korea certainly didn't help things after their attack on the South last night. 

Stay tuned.  I will be monitoring things very carefully.


Anonymous said...

so, what should we be getting into? is this deflationary?

Jeff said...

Cash. Hold some short positions to hedge out any long potistions.

Avoid bonds for now although a stock panic could help them in the short term.

I fear that the debt contagion might spread over here.

Own a little gold(5% or so) to protect yourself against currencies.

I think all of this is deflationary in Europe if we start to see debt destruction.

They can't inflate their currency like we can.