When I look at this chart I see 5 countries whose interest rates were as low as Germany’s rates until 2009. And then suddenly all hell broke loose. Their debt loads were extreme in 2008, but no one worried about it until the shit hit the fan. The U.S. has ten year rates of 1.6%, but our debt load accelerates by $3.8 billion per day. It won’t matter until it matters. Then our shit will hit our fan.
Saturday, Greeks will head to the polls in a second attempt to form a government — an election/government that may ultimately determine if Greece remains in the euro zone. While the implications for Greece are dramatic, there is concern that a Greek exit would threaten other euro zone members (e.g. Spain and Italy) and potentially test the ability of European institutions (e.g. the European Central Bank) to prevent contagion. Today’s chart helps illustrate the risk of European debt by plotting out the 10-year government bond spread (versus the German Bund) for all the PIIGS (i.e. Portugal, Italy, Ireland, Greece, and Spain) from 2007 to the present. For example, the Greek 10-year government bond yield (light blue line) is currently 27 percentage points greater than that of the relatively stable German Bund. That is a far cry from where it was back in the summer of 2009. Currently, however, many are focused on the third and fourth largest euro zone economies (i.e. Italy and Spain). A run on the financial institutions of these more substantial economies would have global implications. It is noteworthy that the Italian and Spanish 10-year government bond spread has not declined after the ECB offered three-year loans in December and February.
So I thought Europe was fixed over the weekend. The MSM pundits and courageous politicians told me so. Stock markets have been programmed to go up this morning. All is well. Right?
If the solution agreed to on Saturday was supposed to save Spanish bankers with German taxpayer money, then imagine what would happen if they decided not to “save” the Spanish bankers. The 10 Year Spanish bond yields have skyrocketed to 6.43%, up from 6.22% on Friday and up from 4.91% in early March. As a reminder, once rates exceed 6% these PIIGS countries have no chance to service their debt. If the market believed that Spain was really saved, interest rates would have declined.
Everyone knows that Italy is just as fucked as Spain. Their rates soared by 19 basis points to 5.96% this morning. This is up from 4.84% in early March. The crisis in Europe continues to worsen. Bailing out bankers on the backs of the citizens is growing old as a solution. Revolution is in the air. The smell of politician and banker fear is wafting across the continent. Pitchforks are being handed out, torches lit and the guillotine is being sharpened. We’ve seen this story before. It should be fun to watch.