The sky is black with PIIGS coming home to roost: I was going to write my customary long and boring think pieceâ€”but the simmering crisis in the Eurozone just got the heat turned up: Things are boiling over there!
So letâ€™s take a break from our regularly scheduled programming, and give you a run-down of this late-breaking news:
The bond markets have no faith in Irelandâ€”Greece has been shown up as having lied again about its atrocious fiscal situationâ€”and now Portugal is teeteringâ€”
â€”in other words, the PIIGS are screwed. I would venture to guess that we are about to see this slow-boiling European crisis bubble over into a full blown meltdown over the next few daysâ€”and itâ€™s going to get messy.
So to keep everything straight, letâ€™s recap:
The spreads on Irish sovereign debt widened, and the Germans are pressing them to accept a bailoutâ€”despite the fact that the Irish government is fully funded until the middle of 2011. But itâ€™s not the Irish fiscal situation that the bond markets or the Germans are worried aboutâ€”itâ€™s the Irish banking sector that is freaking everyone out.
After all, the Irish government fullyâ€”and very foolishlyâ€”backed the insolvent Irish banks back in 2008. And for unexplained reasons, the Irish government is committed to honoring Irish bank bonds fullyâ€”which the country simply cannot afford. However, German banks are heavily exposed to Irish banks, which explains why Berlin is so eager to have Ireland accept a bailout.
Right now, European Union, International Monetary Fund and European Central Bank officials are meeting with Irish representatives, putting together a bail-out package. The reason the Irish are so leery, of course, is that any bail-out would be accompanied by very severe austerity measures: In other words, the Irish people would suffer the consequences of shoring up the Irish banksâ€”which is the same as saying the Irish people would suffer austerity measures in order to keep German banks from suffering losses. Also, the EU/IMF/ECB bail-out would probably also cost the Irish their precious 12.5% corporate tax rateâ€”a key magnet for bringing capital to the Emerald Isle.
Add to the Irish worry, Greece is once again wearing a bright red conical dunce cap: Theyâ€™ve been shown up to have lied again about their fiscal situation. Three guesses what they lied about: If you guessed Greek deficit, you winâ€”yesterday, the Greek government officially revised its deficit figures: 15.4% for 2009, and 9.4% for 2010 (as opposed to an original 7.8% projection). Odds are good that these figures will be revisedâ€”for the worseâ€”soon enough: Nobody believes anything other than Greece is insolvent.
Thatâ€™s whatâ€™s going on this morningâ€”and as a reaction, the dollar (if you can believe it) is roaring back alive: As I write (noon EST), the Euro is at $1.3511, the Pound at $1.5870, gold down to $1,333 an ounce, silver $25.05 an ounce; the dollar is up Â¥83.45.
There was no specific reason why things took a turn for the worse todayâ€”but this downturn of sentiment has been having a cascading/contagion effect through the rest of Europe:
As a result of the Irish not taking the EU bail-out, Portugalâ€™s debt started to tumbleâ€”which has everyone worried. Portugal is looking an awful lot like Greece did five-six months ago: Itâ€™s debt spread over the German benchmark is 6.5%, and climbing. Even Franceâ€™s debt yield spread widened against the German bundâ€”it costs more to insure French debt than it costs to insure Chilean debt (I guess a good â€œViva Chile!â€ would be in order?).
The reason the entire slate of Euro bonds are tumbling is because of Irelandâ€”but the real worry is Spain.
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