Posts Tagged ‘Sovereign Debt’

Two Banks With a Country Attached

Monday, April 1st, 2013

Cyprus?  Really?  The population of Cyprus is just north of 1 million people.

In comparison, the Boston area has a population of 4.6 million.  Greece has a population of about 10.8 million.  Central Massachusetts has a population exceeding 800,000.  Would a financial crisis involving two banks in Worcester shake the financial system the way the financial crisis in Cyprus has?

Of course not.  Then again, Worcester is not a tax haven for Russian billionaires, who use Cyprus as their Cayman Islands.  Russia has kept many Cypriots gainfully employed through the country’s two largest banks, Bank of Cyprus PCL and Laiki Bank.


Europe – The Weakest Link

Friday, February 15th, 2013

With the election, sequestration showdown and other pressing domestic news, we’ve hardly had time to think about Europe.  Yet the continent is as troubled as ever and is crying out for attention again.

Keep in mind that, in this era of a global economy, our fates are intertwined.  Europe and America are heavy trading partners and our multinational businesses are located throughout each other’s continent.  Our banks own European bonds.  So when Europe is in trouble, so is the U.S.

Well, Europe is in trouble.  We’d say “in trouble again,” but it’s never really gotten out of trouble; at least not since Greece triggered the sovereign debt crisis.  The popular British game show, “The Weakest Link,” could serve as a metaphor for the whole continent, except that what’s happening in Europe is not nearly as entertaining.


Ignoring the Cliff

Monday, December 17th, 2012

The fiscal cliff beckons and, as previously predicted, a resolution is unlikely.  So let’s ignore the cliff this week and consider what’s happening elsewhere.

Viva Europe!

Last week was a good week for Europe – at least in comparison to most weeks.

The Eurozone is in a recession; unemployment continues to rise, and both industrial production and retail sales have dropped even further than had been predicted.

So where’s the good news?  Well, for starters, European leaders were given the Nobel Peace Prize.  While we’re not sure what the sovereign debt crisis has to do with war and peace, at least Europe is not the Middle East.  In what other continent do neighboring countries lend billions of dollars to each other when they have no hope of ever getting it back?

In addition, the European Union reached two agreements this week:

  • The 27 EU countries agreed to give the European Central Bank (ECB) oversight of their banks
  • They also agreed to provide Greece with an additional $64 billion in bailout funds

The ECB has not always shown sound judgment and the wisdom of pouring more money into the Greek sinkhole remains to be seen.  But the Greek funding will at least stall a default, which could potentially bring down the currency union, and the banking agreement should at least expedite decision making.

Whether the new agreements will help solve the crisis or prolong the pain remains to be seen, but at least the European Union negotiated and reached compromises.  That’s more than can be said for President Obama and the U.S. Congress.

Volatility: Europe vs. the U.S.

The inability to compromise is affecting the volatility of U.S. markets.

This week, for the first time this year, Europe’s volatility index (VIX) dropped below the U.S. VIX (16.6% vs. 16.8%).  In addition, Europe’s Euro Stoxx 50, the European equivalent of the Dow Jones Industrial Average, is easily outperforming the DJIA, with a year-to-date return of +13.5% vs. +7.75%.

Zero Hedge reported, “Are we seeing a wholesale capital outflow beginning as US’ Fiscal Cliff fears trump any year-end shenanigans potentially coming from Europe (post-Summit)? One thing is for sure, certain media individuals will have to change their tune now Europe is the year’s winner and the US becomes the center of the world’s event risk focus.”

High-Frequency Trading Is “Predatory”

Credit Suisse’s trading strategy team released a report this week called, “High Frequency Trading – Measurement, Detection and Response,” in which the firm said, as Zero Hedge put it, “that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition.”

Get Your Food Stamps!

With unemployment figures and the housing market improving, the U.S. economy is on the upswing, right?  If that’s the case, why are a record number of Americans receiving food stamps?

According to the U.S.D.A., a record 47.7 million Americans are now living in poverty.  In September, a record 607,544 Americans became eligible for food stamps.

Imagine if we were in a recession!

The Other QE

Friday, September 7th, 2012

It’s not QE3, the Fed’s highly anticipated and much discussed quantitative easing program, but the European Central Bank’s (ECB) bond buying program is having a similar impact.

Stock markets worldwide rose announced its bond-buying program yesterday.

Bond buying is Wall Street’s version of crack … it costs money and has a negative long-term impact, but it creates a temporary euphoria and makes everything seem just find for the those who want to live in the moment.

As The Wall Street Journal put it, “we suppose the good news is that it isn’t as sweeping as it might have been.”

To receive money from the ECB, countries that want help must first apply to the eurozone’s bailout fund.  Countries that receive assistance must consent to reducing government spending and debt.

In reality, though, countries like Spain, Italy and Greece are under pressure from citizens who don’t want austerity.  They’re protesting in the streets of Spain because the government would like to reduce their generous benefits … and politicians who want to survive had better take heed.

The program also has the potential to send bond yields soaring, not to mention causing higher inflation.

Conversely, one reason the markets responded favorably is that the program reduces the risk of a Eurozone break-up – at least for now.

Dancing With A Cow

Tuesday, July 17th, 2012

While Europe’s sovereign debt crisis has beaten down the U.S. stock market, it has helped the bond market.

Because the European bond market is in such poor shape, U.S. bonds are a relatively healthy investment.  Investors have been buying U.S. bonds, because they look good relative to European debt.  But that’s like dancing with a cow because your only other option is a pig.

U.S. yields are at record lows, even though U.S. debt has now reached $15.9 trillion, up from $9 trillion in 2007.  The 10-year Treasury yield, which has averaged 4.88% over the past two decades, hit a record low of 1.44% on June 1, down from its high for the year of 2.4% percent on March 20.

Regardless, the cow may be turning into a pig.  Robert Auwaerter, head of Vanguard Group’s fixed-income group, predicted that unless the U.S. gets its debt under control within the next four years, U.S. bonds will become about as popular as the bonds of the five European countries that have seen borrowing costs soar as investors boycotted their bonds.

What Bloomberg called a Treasuries Doomsday isn’t on the Mayan calendar, but it could be as grim as those end-of-days predictions, at least from a financial perspective.  If yields were to rise back to 3.8% by December 2014, which is their average for the past decade, investors would realize loses of 10.8%.

Demand for U.S. bonds has enabled the Federal Reserve Board to keep borrowing costs low, and President Obama and Congress to fund a budget deficit that’s forecast to exceed $1 trillion for the fourth straight year.

However, Auwaerter said, “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough.’ ”

Finally – U.S. Drags Down European Market … Japan Falls, Too

Wednesday, July 11th, 2012

We’ve been writing about Europe dragging down the U.S. stock market for more than a year now.  We, of course, take no satisfaction in it, but it’s kind of a “man bites dog” story to report that U.S. jobs data moved European markets lower at the end of last week.

Germany was down 1.9%, Spain was down 1.5% and the UK market was flat.

Meanwhile, while bailouts all the rage in Europe and the U.S., debt-laden, over-spending Japan is intent on joining in the fun.  Japan’s Finance Minister suggested the government could run out of money as soon as October if a bond bill is not passed.  Japanese stocks fell in response.

Even Germany’s Credit Is Slipping

Friday, June 29th, 2012

Greece.  Italy.  Spain.  Ireland.  Even France has experienced a wavering credit rating.  But Germany?

Germany has been Europe’s voice of reason, a financial pillar among a creaky, malfunctioning continent with the financial foundation of a sand castle.

We previously asked whether Germany would have the stamina to lift up the rest of Europe or be dragged down by its bailout-addicted brethren.

One sign that Germany is being sucked into the European sinkhole is that Egan Jones just downgraded Germany’s credit rating from AA- to A+.  Granted, Greece is unlikely to see anything near an A+ rating in our lifetime, but for Germany, it’s a stumble, if not a fall from grace.

It’s not that Germany is being irresponsible.  It’s that its debtors are not paying up.  According to, “Germany is owed EUR700B of which perhaps 50% is collectible … Germany’s debt to GDP was 87% as of 2011. However, increasing Germany’s debt by EUR700B to EUR2.9T for its indirect exposures raises the adjusted debt to GDP to 114%.”

We can only hope that it’s not a sign of things to come.  Yet, as an increasing number of European nations decide that they’ve had enough austerity, without so much as trimming a few vacation days, it’s unlikely that socialism will give way to pragmatism anytime soon.

In fact, Germany’s resistance to printing money as a way out of the sovereign debt crisis is increasingly making the country the odd man out in Europe, even though printing money is a sure path to hyperinflation.

Maybe Germany should leave the Eurozone instead of Greece.

Bad News Boosts the Market

Tuesday, June 12th, 2012

In the strange world of investment management, bad news is often good news.

That was the case last week, as the S&P 500 gained a hefty 3.7%, more than reversing its 3% loss from the previous week.

The market rose 2.3% on Wednesday alone – its largest single-session percentage gain so far this year – amid signs that the already tepid economic recovery is slowing further.

So why did the market rally?  Because traders speculated that the Federal Reserve will react to the slowing economy with additional stimulus.

Fed Chairman Ben Bernanke didn’t even hint at any immediate plans for a third round of quantitative easing or any other steps to stimulate the economy.  The European Central Bank (ECB), likewise, left its benchmark interest rate at 1.00%.  However, ECB President Mario Draghi said that actions would be taken if needed.

So the chance that another round of stimulus may take place is enough to boost the market 3%.

S&P 500 Chart

Given that economic growth remains anemic and the unemployment rate is at 8.3% and is generally creeping up, not down, previous rounds of stimulus have had virtually no long-term impact.

Short-term, though, markets love quantitative easing, which makes investments in stocks appear desirable by making investments in other assets undesirable.

So if quantitative easing doesn’t help the economy and provides only a short-term boost to stock prices, maybe the Fed should just float a few rumors … plan a faux round of quantitative easing to give the markets a boost without any cost or harm to the economy.

The Pain in Spain, Part 2

 Spain added to the good-bad news last week, as Fitch downgraded Spain’s debt rating from A to BBB after the country held a successful debt auction.

A teleconference last week between G-7 finance ministers to discuss Spain’s banking system, along with other Eurozone problems, failed to yield any specific plan for addressing the crises, and Fitch followed up yesterday by dropping ratings on two major Spanish banks, Banco Santander S.A. (STD, SAN.MC) and Banco Bilbao Vizcaya Argentaria S.A. (BBVA, BBVA.MC).

The downgrades, from A to BBB, came in spite of a weekend agreement by the Spanish government to a European Union bailout of up to EUR100 billion, or about $125 billion.

Spain joins Greece, Portugal and Ireland in the growing list of bailees.  Soccer anyone?

Compared To What?

Tuesday, June 12th, 2012

The U.S. dollar is the strongest it’s been in a year-and-a-half.  Is this renewed strength a sign of American economic strength?

In a way – but it’s all relative.  The euro broke to a new low recently, and the dollar and the Japanese yen were both stronger, because of a flight to quality.

Japan, which is still recovering from last year’s earthquake and tsunami, has enormous debt, as does the U.S.  So if the dollar and yen are strengthening, it’s a sign that the euro is in deep, deep trouble.

The yield on 10-year U.S. treasury bonds hit a new low recently, at 1.45%, as did the 10-year German bund (1.18%) and the 10-year British gilt (1.53%).

 Is Europe Burning?

Even the ever-bullish MarketWatch was noting a swoon in global markets, due to “fresh concerns that the European currency union is nearer to dissolution.”

As MarketWatch’s David Callaway noted, “Investors are rushing to safe havens in preparation for financial Armageddon, the long-feared run on European bank deposits that is expected to develop once Greeks awake some Monday morning this summer to find out the euros in their bank accounts have turned into devalued drachmas.”

 The Pain in Spain

In addition to growing conjecture that Greece is going to exit the euro, there is growing conjecture that Spain’s banks will need to be bailed out.

Recently, the S&P 500 broke below 1300.  Not coincidentally, at pretty much the same time, the yield on Spanish bonds went much higher.  Shortly afterward, the International Monetary Fund made a statement that it is considering bailing out Spain.  Shortly thereafter, the IMF made a statement denying any potential bailout.

So what’s really happening in Spain?  The answer is anyone’s guess, but if you’re considering investing your life savings in Spanish bonds, you may want to reconsider.

At least the price of oil is dropping.


Key Indexes

YTD (As of 5/30)

S &P
500 (SPX)


Composite (COMP)


Crude oil (NMN: CLN2)


Spain Ibex 35 (XX:IBEX)


Japan Nikkei 225 (JP:100000018)


Hong Kong


Russia RTS


Euro vs. dollar (EURUSD)


Treasurys (return) (10_YEAR)


index (DXY)


CBOE Market
Volatility Index (VIX)



Beyond Sovereign Debt

Friday, November 11th, 2011

Put together a union of strong countries like Germany and weak countries like Greece and what will happen?  Will the weak countries learn from the strong ones and become fiscally responsible?  Or will they expect the strong countries to support them and drag them down in the process?

The later appears to be the case in Europe, where sovereign debt contagion has spread from Greece, Italy, Spain, Portugal and Ireland to threaten the European banking system.

Many European governments have spent recklessly and even attempts to keep the crisis from spreading are being met with wide resistance.  Once a government entitlement is given, it is difficult to take it away.

The crisis goes well beyond government spending.  As Stratfor Global Intelligence recently noted, while attempts are being made to control sovereign debt, “all of the broader problems of overcrediting, housing markets, pensions problems” are not even being addressed.

But the sovereign debt crisis and the European banking crisis are joined at the hip.  The severity of the problem was made evident by the October collapse of Franco-Belgian bank Dexia, which agreed to nationalize its Belgian banking business in exchange for a 90 billion euro ($121 billion) bailout.  Austria has also seen a couple of bank failures, and banks in France have also been reported as being in trouble.

Stratfor believes that “Europe’s banks are as damaged as the governments that regulate them.”  The firm’s analysis notes that, “As a rule the largest purchaser of the debt of any particular European government will be banks located in the particular country. If a government goes bankrupt or is forced to partially default on its debt, its failure will trigger the failure of most of its banks.”

In Europe, banks are more highly regulated and are more dependent on the government than in the U.S.

“You have got the states, who have the banks beholden to them, they are able to twist the arms of the bank executives and force them to do things they would not otherwise do,” according to Stratfor Vice President of Analysis Peter Zeihan.  “Banks just are not willing to challenge the regulators, and so you probably will be able to get a significant buy-in that is voluntary, although not very voluntary.”

And just as European banks are dependent on their government, the European economy is deeply dependent on European banks.

“Americans only use bank loans to fund 31 percent of total private credit,” Stratfor notes, “with bond issuances (18 percent) and stock markets (51 percent) making up the balance.  In the eurozone roughly 80 percent of private credit is bank-sourced.”

This interdependence hints at the complexity of the sovereign debt problem, while underscoring just what’s at stake and why all of Europe is so dependent on a solution to the sovereign debt crisis.