The next domino in Europe begins to wobble

(9 am. – promoted by DDadmin)

  While America was distracted with issues of guns, political rhetoric, and domestic violence, the sovereign debt crisis in Europe reached its next tipping point.

 Alan Wilde, head of fixed income and currency at Baring Asset Management, said: “The crisis is reaching another key phase with debt auctions this week. It seems unlikely that Portugal can avoid a bail-out.”..

 In a further blow to Mr Sócrates, António Bagão Félix, a respected former finance minister and rightwing politician, said on Monday that it was no longer a question of “if” Portugal would have to turn to the European financial stability facility, the EU bail-out fund, for help, but “when”.

  The cost to the country of high bond yields was increasing every day, he said. “The situation is unsustainable.”

 The European Central Bank was forced to intervene on Portugal’s bond market on Monday when investors came close to abandoning the country’s debt entirely. The yield on 10-year bonds reached a near high of 7.18%, a rate similar to that which triggered the bailouts of Ireland and Greece.

  7% seems to be the critical level. It took just 16 days for Greece to ask for EU/IMF aid once their 10-year yield breached 7%. It took Ireland just 20 days to ask for help.

 The latest straw for the back of Europe’s bond market was the announcement from Portugal’s central bank, which reported that Portugal’s economy would shrink again this year.

 Portugal’s government, just like Ireland and Greece before it, has insisted that it will not need a bailout. That prediction will be severely tested tomorrow when Portugal attempts to tap the international bond market.

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 Meanwhile, the bond markets, already looking ahead, seem to have picked out a new “next domino” – Belgium.

 Funding costs for Portugal have already breached 7% and contagion has seen yields on 10-year Spain and Belgium both above their November highs. The longer policy makers dither in announcing what are unpalatable decisions the more likely it is that containment becomes that much more difficult. The market focus has already shifted to Spain and Belgium with the spread narrowing on 10yr Belgium/Spain since the beginning of the year suggesting that Belgium is a much bigger focus than Spain.

Credit default swap costs for Belgium have increased 71% in the past three months, as opposed to 51% for Spain and 22% for Portugal.

 Besides Belgium’s large legacy debt (the 3rd largest in Europe), the country is beset by its failure to form a governing coalition.

 Belgium’s troubles have caught Europe off-guard. When the ECB set up its huge stabilization fund, the idea was to protect Spain. It was meant to protect Belgium. There is now talk about expanding the scope of the fund.

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Meanwhile, all the steps taken so far have not actually fixed anything. The cost of Greek debt has hit new all-time records. What this means is that once Greece burns through the bailout cash it will still be broke and unable to borrow, thus making default unavoidable.

 The cost of borrowing for Ireland has also reached new highs. Ireland’s bailout fixed nothing.

 Spanish debt, while not critical yet, is still near danger levels.

 What brought all this on? Only Greece brought it upon themselves. Ireland, Portugal, and Spain all got into this situation because of private sector borrowing, a stagnant economy, and an irresponsible banking sector.

 Yet in every case the solution is always the same – cut services and wages. The working class are always the first to suffer even if they didn’t cause the problem.

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19 comments

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    • gjohnsit on January 11, 2011 at 9:08 pm
      Author

    Who will be after Portugal? Belgium? Italy? Spain?

    At what point will the Euro have to be restructured?

  1. … what a mess.  

  2. Cut social services and raise taxes on the poor and middle class.

    The only answer the rich are capable of coming up with.

  3. to piss on the bull at Wall St. here in NY.

    But I can’t even afford the train ticket to go there and do it until friday when I get paid.

    Can we riot yet?

  4. http://www.economist.com/blogs

    The interactive graphic above (updated January 12th 2011) illustrates some of the problems that the European economy faces. GDP picked up in most countries through 2010 but there were marked differences in performance. Germany was especially sprightly: its economy rose by almost 4% in the year to the third quarter. But GDP in Greece has crashed under the weight of austerity; Ireland has yet to emerge convincingly from a deep recession; and Spain’s economy is barely growing. It is notable that GDP countries outside the euro, such as Britain, Poland and especially Sweden grew at a faster rate than the euro-zone average in the year to the third quarter.

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