By Jeff Harding
Things are getting rather serious in Europe as the
bond vigilantes are hammering sovereign bonds. The carnage is starting to spread to France, Finland, Netherlands, and Austria.
Bond yields across the Continent jumped as prices
dropped, in a sign of investors’ faltering confidence in officials’ ability to
keep the debt crisis contained in the euro zone’s troubled peripheral
countries. Tuesday’s selloff came amid news that the euro zone’s economy
scarcely grew in the third quarter.
Trading of anything but German bunds—seen as safe
securities akin to U.S. Treasurys—became difficult. Investors sold bonds issued
by triple-A rated France and Austria. Even prices of bonds issued by fiscally
upright Northern European triple-A nations such as Finland and the Netherlands
fell. Among the cash-strapped periphery, Italian bonds again rose above 7% and
Spanish yields surged to 6.358%, according to Tradeweb. …
Tuesday’s plunge began in Asia and the Middle East,
where there was heavy selling of European bonds, market participants said. Of
note also, they said, was that much of that was coming from long-term investors
such as pension funds and mutual funds, rather than hedge funds. …
Germany’s central bank, the Bundesbank, and the
country’s economic and political mainstream are vehemently opposed to a more
activist ECB, arguing that large-scale bond-buying would fuel inflation and
turn the central bank into a plaything of spendthrift Southern European
politicians.
The more the crisis of investor confidence spreads
into Europe’s core economies, however, the less euro-zone governments can do to
solve it. Already, France’s government is wary of any policy measures that
could call its vulnerable triple-A credit rating into question and drive up its
borrowing costs.
If the capital flight from bond markets continues, the
ECB will increasingly become the only institution in Europe that is capable of
stabilizing the situation. A change in thinking in Germany would likely be
needed before the ECB embraced a bigger firefighting role, however. …
Investors are also paying more for protection against
debt defaults. The five-year credit-default swaps of Italy, Spain, France and
Belgium all hit records, while the levels for Austria and the Netherlands
pushed wider as well. Italian default swaps briefly pierced 600 basis points
for the first time.
Europe is at one of those impasses whereby the Germans
don’t want the ECB to print the eurozone out of the problem, yet, with bond
yields going up, it puts pressure on these countries’ ability to pay their
debt. This is scaring off investors, so rates are climbing.
Two days ago, Bundesbank president Jens Weidmann said that Germany is strongly opposed to the European
Central Bank buying sovereign debt of eurozone countries:
Mr Weidmann highlighted the stance being taken by the
Bundesbank by arguing governments, not central banks, were mainly responsible
for ensuring financial stability. Mario Draghi, the ECB’s new president,
has said it is not the ECB’s job to act as lender of last resort, but Mr
Weidmann went further, saying such a step would breach Europe’s ban on
“monetary financing” – central bank funding of governments.
If you think political impasses are confined to the
U.S., then let me introduce you to the fiasco that is the euro. There are only
two things that can happen here. They can let these countries who are about to
default, default. That would mean massive economic chaos in not only those
countries, but it would spread to the rest of Europe and ultimately to the rest
of the world as economic activity declines. Or they can print.
Germany can complain all it wants about the inability
of its fellow EMU members to solve their fiscal problems, but for many of them
the situation is critical. I believe that the European Central Bank will print.
That is, they will engage in massive buying of bonds of member states, thereby
monetizing sovereign debt. And, if Italy, France, Spain, and the Netherlands
continue to be hit with rising interest rates, that time is not far off.
Germany thinks they have a veto here, but they don’t.
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