Benjamin West ‘Portrait of Samuel Morse’In today’s economic crisis where the policy approach is to ‘Never fix anything because a banker might be ruined’ it is no surprise that the European sovereign key men are starting to crack under the strain. Ireland is getting the under- the- table bailout treatment from the European Central Bank (Financial Times):
ECB intervenes in Irish bond markets
By David Oakley in London and John Murray Brown in Dublin
Published: September 17 2010 19:25 | Last updated: September 17 2010 21:31
The European Central Bank intervened to stabilize the Irish bond markets on Friday after a report by a leading UK bank triggered investor fears that the country might turn to the international community for a multibillion-euro bail-out.
The renewed bout of jitters sparked a half a percentage point jump in two-year Irish bond yields and pushed 10-year yields and the cost of insuring the country’s debt against default to record highs.
Although investors said Dublin would only need financial help in the event of more unexpected banking losses and a deterioration of its economy, the Irish sell-off highlighted the continued fragility of eurozone bond markets.
Traders said the intervention by the ECB was small – in the tens of millions of euros but the report by Barclays Capital still prompted the International Monetary Fund to state it did not envision that Ireland would need financial assistance.
The Irish government will test investor sentiment on Tuesday with an auction of four-year and eight-year bonds that bankers warn could see the country having to pay high yields to attract demand.
Domenico Crapanzano, head of euro rates trading at Jefferies, said: “There are just no buyers out there for Ireland because of worries over its banks and economy. Ireland and also Portugal are very much the worry for investors.”
I guess austerity is a failure. Check out this fleeping chart:
Yikes! That’s only about 3.3% higher than the 2 yr yield on German bonds; the latter yield would not even appear on this chart! The center is busily sucking the economic life out of the peripheral weaker nations. so much for the crisis being ‘contained’.
Irish Concern
In the year so far German bonds returned 7.9 percent, according to indexes compiled by the European Federation of Financial Analysts’ Societies and Bloomberg, amid concern some so-called peripheral European nations would struggle to narrow their deficits. The securities advanced yesterday on speculation Ireland’s banks may require further government aid.
The extra yield investors demand to hold Irish 10-year debt instead of bunds climbed 47 basis points this week to 388 basis points, the most since Bloomberg began collecting the data in 1991.
Bunds may decline next week as the German government sells 6 billion euros ($7.9 billion) of new five-year notes on Sept. 22.
“The market faces a crunch point when we get the supply,” Credit Agricole’s Chatwell said. “I don’t think that five-year paper is particularly attractive with the 10-year yield around 2.4 percent. Depending on the auction result, it could set bunds lower and give us another test of 2.5 percent.”
Nothing new here, just shuffling around the deck chairs on the Titanic. Ireland is yet another collapsed real estate bubble. There is insufficient cash flow to the island’s economy to service its massive and increasing debt load. Something has to – and will -give. The question is which of the four or five peripheral European nations will default first? Greece? Portugal? Romania? Spain?
What is taking place in all of these countries is the ‘Austerity science experiment’ which can also be considered energy conservation by other means. Austerity cripples the business needed to fund repayment of loans. How can something so blatantly unproductive succeed? Why try it?
Its iteration during the early 1930’s was a catastrophic failure. When cheap moralizing is substituted for sensible policy the outcome is failure followed by ECB bailouts. All of this was predictable – and has been.
While austerity- nonsense takes place the expanding German economy – poised at the center of the Eurozone vortex – thrives by selling expensive luxury automobiles to the wealthy Chinese managerial elite among others:
The success of the euro-area’s largest economy owed a lot to a surge in exports (much of it to emerging markets) and to investment by firms at home looking to upgrade and expand their capital stock to meet that demand. Germany’s talent for bespoke engineering and sleek cars fits well with the needs of fast-industrialising countries and their new middle classes. China is a prized customer for the German firms that supply kit for power plants and other infrastructure projects. Small producers of niche capital goods have also seen a surge in orders. German cars have been selling well to affluent consumers in emerging markets. Sales of luxury Mercedes cars to China tripled in the year to July. Sales to India more than doubled. Other carmakers, such as VW and BMW, have prospered too.
The developing nations import consumption and export conservation to the unwilling Greece and Ireland. Because the multi- pole bankrupting mechanism operates over vast distances across national borders it is rendered invisible … that is, until a participant is bailed out. A small article is then written in some back pages of the Financial Times.
Nothing to see here folks, just move along …
The time is ripe to start looking for a return of the euro crisis as more countries edge toward default and the Euro- community as a whole gears up to provide another round of currency printing. So far, the euro has been supported – vs. the dollar – by the willingness of the Germans to export deflation to the rest of the European community. This runs counter to the ordinary ‘Business as Usual’ analysis that holds that an overvalued euro renders exports uncompetitive. Clearly, this is not the case with Germany. The Germans are importing value from the rest of the Eurozone, enough to offset higher costs that the strong euro adds to German exports.
Similarly the strong yen represents value imported from its customers – particularly Americans – which offsets the effects that the overvalued currency has on its exports.
Priced in oil dollars are still quite valuable, even as dollars – and euros, yen and other currencies – against gold are viewed with suspicion. Other than Mercedes and Porsches – which never be considered investments under any conceivable set of circumstances – gold right now is the only bull market that is out there. Is it a bubble?
Since gold is more liquid that cash dollars and easier to store, is unaffected by Fed ‘programs’ and various currency manipulations it looks like a good short- term trade. Here’s a gold chart (COMEX, GC) from TFC charts, there is a lot to like in this chart:
The break in gold beginning in November of last year coincided with the end of the dollar carry and the first hints of euro- strains. The dollar became ‘hard’ priced in crude and it’s still hard and becoming harder. Here’s a crude chart:
This is the front month NYMEX crude, you can see that the high price levels reached during the term of this contract have been declining since the Giant Spike of 2008. The world is getting poorer, there is less wealth to direct toward business and what remains is being directed toward gold.
Say what one will about the utility of gold, the utility of crude oil is unquestioned. If crude oil price declines it has a profound effect on the ability of crude production to maintain itself. New supplies of crude exist in unfavorable environments deep under the ocean, in the arctic and inside the frontiers of hostile states. The inability of producers gain new supply encourages current producers to hoard their product. Commerce and industrial output are starved. The consequence is the inability of commerce to afford its most important input.
At the same time, gold is a speculation which can earn only by the decline in value of what is traded for it. Trading the crude- proxy dollar for gold suggests that ‘investors’ are speculating that commercial returns will fall. Since many of these speculators are ‘smart money’ finance insiders recently bailed out by their respective governments, their actions speak for themselves.
Gold represents a cynical and diabolical trade but we live in cynical and diabolical times. The market call here is to buy some (physical) gold and look to short crude. Breaking crude below the support @ $66/70 would mean a retest @ $60 per barrel. This would not just be a deflation price but a depression price, BTW.
The deluded Chinese are following an obviously failed US consumption model and buying gas- guzzling cars on one hand while smart- money finance insiders are buying gold with hard dollars on the other … how cynical can you get?
The extra yield that investors demand to hold 10-year Irish bonds over German bunds today exceeded 400 basis points for the first time as the government struggles to convince investors it can cap the cost of bailing out its banking system. Portugal is also being punished by investors, with the spread on its bonds also touching a record today. That’s fueling concerns that both countries may have to follow Greece and ask the European Union and the International Monetary Fund for a rescue.
“We think there is a measurable risk that Ireland and Portugal will access the EFSF and IMF, but probably only early next year,” Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said in a note yesterday. The countries are still well funded for some months, though a planned Irish bond sale tomorrow may be a “test,” Nielsen said.
Contracts insuring against an Irish default rose to a record 450 basis points from 421 today, according to data- provider CMA. Ireland is scheduled to sell between 1 billion euros ($1.3 billion) and 1.5 billion euros of four-and eight year bonds. Irish Finance Minister Brian Lenihan told reporters in Dublin today’s he’s “concerned” about the jump in Irish spreads, which rose as high as 404 basis points today. Portugal’s spread was 399 basis points.
Irish Sale
Investors are selling Irish bonds partly on concern about the cost of rescuing Anglo Irish Bank Corp., which was nationalized last year. Standard & Poor’s said in August that Ireland may have to inject as much as 35 billion euros “over time,” putting pressure on the national finances. The government has injected 22.9 billion euros to date.
The pattern has been anxious media reports with accelerated risk revealed in CDS spreads leading to runs a month or two later. Paul Krugman calls the (austerity) process: “The beatings will continue until morale improves.”