The people buying bonds issued by Italy and Spain are clearly looking past the dysfunctional balance sheets and focusing on Germany’s reluctance to let a major PIIGS country default. So an Italian bond, in the mind of the market, becomes a German bond.
But this sword cuts both ways. If European debts are tossed into one big communal pot with everyone responsible for everyone else, then buying a German bond is the same thing as buying an Italian bond — since German taxpayers are ultimately on the hook for both. Viewed that way, lending money to Germany for ten years at 2% is hardly risk-free.
Which is why the failure of Germany’s most recent bond auction is so interesting:
German Bonds Fall Prey to Contagion
Nov. 26 (Bloomberg) — European bonds slumped after Germany failed to draw bids for 35 percent of the offered amount at an auction of 10-year bunds, stoking concern the region’s debt crisis is infecting even the safest sovereign securities.Thirty-year German bonds slid, with yields rising the most since the week through Sept. 3, 2010, amid concern Germany will need to offer greater financial support to its euro-area peers. “Non-residential investors are increasingly troubled by events,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “It was ignited by the 10- year bund auction result showing further credit dilution, and hasn’t been helped by the outcome of Italian sales.”
Thirty-year German bond yields rose 21 basis points to 2.83 percent at 4:54 p.m. London time yesterday, from 2.61 percent the week earlier.
Total bids at the auction of German securities due in January 2022 amounted to 3.889 billion euros ($5.15 billion), out of a maximum target for the sale of 6 billion euros, sparking concern that the turmoil emanating from Greece’s debt crisis now risks engulfing the region’s biggest economy.
And last week was just the warmup for next week’s deluge of new borrowing:
Italy Leads Busy Week of Euro-Zone Bond Sales
FRANKFURT—Italy, Belgium, Spain and France all plan to sell bonds next week, a big test for a region still reeling from unexpectedly weak demand for debt from its German core.Given the surge in bond-market yields in recent weeks, all four countries are expected to pay considerably more for cash than they did at their previous auctions. Just how much higher the tab turns out to be will indicate the extent to which investors are giving up on the ability of politicians to take tough measures to reduce their debt loads.
All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt next week, more than double the amount three governments sold this week.
Italy will offer up to €750 million in 2023-dated inflation-linked bonds on Monday, followed a day later by up to €8 billion in debt maturing in 2014, 2020 and 2022. The sales come after the country on Friday paid 6.5% to borrow six-month funds, nearly double the 3.5% it paid only a month ago, and its bond yields again soared, to worrying levels solidly above 7%.
Meanwhile, the shape of the bailout is becoming more clear:
IMF Readying Loan of as Much as $794 Billion for Italy, La Stampa Reports
The International Monetary Fund is preparing a 600-billion euro ($794 billion) loan for Italy in case the country’s debt crisis worsens, La Stampa said.The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the Italian daily reported, without saying where it got the information. Monti could draw on the money if his planned austerity measures fail to stop speculation on Italian debt, La Stampa said.
Italy would pay an interest rate of 4 percent to 5 percent on the loan, the newspaper said. The amount could vary from 400 billion euros to 600 billion euros, La Stampa said.
Huge week coming up
It’s no surprise that a new bailout is announced today. Without a compelling distraction, the markets would fixate on upcoming bond sales and would probably demand even higher rates, effectively bankrupting the PIIGS countries and hobbling Germany and France. So something big has to happen, and right away.
The International Monetary Fund, meanwhile, isn’t some independent government with farms and factories and oil wells that it can tax to fund its foreign aid activities. It’s just a bank, sort of, holding deposits from the US and other formerly rich countries, which it then lends to supposedly poorer ones. So an IMF loan to Italy is in reality a US/German bailout. There is no free lunch, there is no extra money sitting around. Everything the IMF has comes, directly or indirectly, from the printing presses of safe haven governments.
And the soon-to-be-announced 600 billion euro bailout is just for Italy. Since Spain, Ireland and Portugal between them owe just as much and are just as functionally bankrupt, expect them to get as much or more in coming weeks.
Which brings us to the nature and function of money. This game is only possible while the US and Germany have currencies with relatively stable values. Should the dollar and/or euro start to fall, then loan guarantees denominated in those currencies become a lot less attractive. Bond prices will fall commensurately, and the owners of those bonds will have massive losses that they’ll have to acknowledge one way or another. The result: zombie banks that can’t afford to lend and underfunded pensions that can’t meet their obligations — and the need for even bigger bailouts.
That’s why this week is so huge. If investors realize that German bonds are really Italian bonds, they’ll demand higher interest rates from all involved (and we should be short the major stock indexes). And if investors realize that the IMF is just the Fed/ECB in drag, they might finally lose faith in those banks’ currencies (in which case gold and silver will soar). In either case, it’s game over for the current system.
25 thoughts on "Make-Or-Break Week For Europe"
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson,
Ha Ha Ha Ha Ha…etc….
Nice article, Yesterdays news.
Super Massive QE III or is that IV, or maybe V, I don’t know, I’ve lost count…started in earnest today. Interbank lending, in USD$, now 50 Basis points cheaper to try and protect insolvent banks/sovereign states. Gold & Silver shifted into upwards gear again. Oil poked it’s head over USD$100 Per/B. USD$ fell back against almost all other paper….
‘Dollar Collapse’ ?!?…..It already has. Gooooonnnnnnneeeee………
Bring on the bank-runs people. Last one to cash in, convert to PM’s, loses.
I’m long Wheelbarrows.
The gloves come off when the technocrat in charge gives up Italy’s gold to the ECB as collateral for the unpayable loans. The gold is what it’s all about. This ain’t rocket science.
I’m not here to preach, but God forbid usury and required debt amnesty every 50 years (Jubile). Charging interest on money is slavery when the money is created by fractional lending without precious metals backing. To pay back more than you borrowed means you must borrow more money. That makes the current banking system a criminal enterprise and any government that supports it is also a criminal enterprise.
The US has used it’s military power to steal oil and rob lesser nations. Maybe it’s time for God to stand up and right this injustice. I am an American by birth but I will not cry at all if the US gets Divine retribution for this. Theft by banking fraud and invading and stealing oil is simply not “Christian” behavior, or decent behavior by any other name.
DAVID: Its not the “USA” or “America” that is robbing the world blind and committing horrible crimes; it is a small group of men who CONTROL AMERICA that are guilty.
If God wanted to shoot all the counterfeiting fractional reserve bankers with lightening bolts, he would have started a couple hundred years ago before the First Bank of the UNited States was founded and before the wildcat banks ravaged he country. Unfortunately, it looks like God is not wanting to get involved with our debt enslavement problem.
” I would rather go to bed supperless than wake up in debt” Ben Franklin
The end is nigh. The teetering tottering tower of debt is closer than ever to collapse. The Germans being unable to sell their bonds, (debt), is a major omen. It augurs badly for the upcoming bond, (debt), sales of Spain, Italy, etc. at any price. Credit is drying up. This crisis has been building for years. The US and Europe living beyond their means, and mortgaging their future, (debt). Well, the future has arrived, first in Europe, and next the US? hypnohotshot.
This is the common tactic of our slave master bankers:
1) Bankers loan massive amount of money/credit (probably created out of thin air) to corrupt leader who claims to represent the “citizens” of a “country.” This leader was probably helped into power with financing from the bankers.
2) Leader blows money on expenses that rarely benefit the victims, er,…”citizens.” Cronies and established friends of bankers/governments make the profits.
3) Leader can’t pay loan, needs to raise taxes (legalized theft) on population. Greek politicians just passed a new property tax for this purpose, against the vast opposition of the Greek people.
4) Any public opposition to obvious scam is attacked with Leader’s military forces. Corrupt news media tries to downplay and confuse issue, using terms like “austerity measures,” etc.
5) If the public does succeed in somehow ejecting corrupt leader, bankers unleash false-flag terror, paramilitary death squads, assassinations, banking crises, etc. Hyperinflations may also be intentionally used.
6) If all else fails, US or British military forces are sent to be the knee-cap breaking debt collectors for the laon shark legalized counterfeiters.
Murray Rothbard documented this common occurence, and pointed out several central american countries as being victims. Smedley Butler also made reference to this in “War is a Racket.”
American troops occupied several Latin American countries for the purpose of enforcing taxation to pay debt to international bankers. Alexandria, Egypt was bombed by British Navy over this debt/tax scam in late 1890’s.
American and British people are largely unaware of this, due to almost complete control of News, film, radio, television, and public education (indoctrination/brainwashing) systems.
However, Murray Rothbard noted that the people in the victimized countries are more aware of the debt enslavement scam. This is why Americans can’t conceive why foreigners “hate us for our freedoms.”
An insightful commentary. The vast minority of folks who have taken the time to understand this are constantly amazed at how obvious truths can be ignored by the rest of the population. These are difficult truths to comprehend, but, for most are impossible realaties to embrace
Great article, what is amazing is that the people in charge can’t see the obvious, that our monetary system is fundamentally flawed. When the only answer they have to “excessive debt problems” is printing more debt based dollars, Euro, or Yen then we KNOW that they have no realistic answers or willingness to actually FIX the problem by structural changes of a badly flawed system.
While ones first conclusion might be that the people in positions of power, whether politicians, bankers, or technocrats doing their bidding are idiots or failed mathematics, the scary part comes when you realize that they are doing this deliberately to further enslave the masses, while convincing them it is necessary to maintain control of a system DESIGNED to enrich the few and impoverish the majority.
DEBT is not a desirable or viable solution for any country, corporation or individuals fiscal problems, it only delays the day of reckoning while enriching the coffers of the International Banker cabal that holds a monopoly to legally counterfeit money with fiat creations out of thin air that systematically destroys the purchasing power of the paper they print. In contrast, REAL MONEY (silver and gold) has maintained their purchasing power for 5000+ years. It is not the price of gold and silver that has been increasing for a decade, it is the paper counterfeit that has been losing its purchasing power ever since the Federal Reserve was enacted in 1913 that is finally exposing the corruption of a deficit financing system that favours only the bankers and those few individuals accumulating a large pool of capitol. The rest of us as ordinary working people are being robbed of our savings and livelihood at an accelerating rate, in fact we are now “Compounding in Reverse” as the debt pyramid spirals out of control. The “magic of compounding” as sold by the establishment has now turned into the “nightmare of fiscal collapse” and you can Google those terms for my essay on the subject.
Germany is learning from its red trading partners, the Chinese, and most likely looking to take the position of a vendor-financing mercantilist among its European partners. Germany won’t let the other EU countires needing to be bailed out breast feed off Germany’s good name.
If you can substitute one thing for another, then they approach being equal. So as you say, if German bonds become the same thing as Italian bonds in the minds of market participants, the value of German bonds must fall, Italian bonds rise, or some combination of the two to approach equality.
And if US bonds are being issued to bolster the debt of bankrupt European government, then too will the same equalization take place, dragging down the value of US bonds while temporarily bolstering European debt values. Yet it is comical that US bonds would even be perceived as preferential to begin with, given the “worse than Greece” financial condition of the US government.
This all reminds me of the insane relationship between the US government, the FDIC, and US banks. The source in the US of newly created money is the Federal Reserve Bank and /or US Commercial banks which create checking account balances out of thin air and loans them into circulation. Most of these banks are insolvent, but they continue to operate because CPA’s and government regulators turn blind eyes, and allow fantasy values to be placed on bank assets, most of which are the debts of governments, businesses, and individuals. The FDIC, insuring the banks’ deposit liabilities to the public, is broke, and turns to the federal government for funds. The federal government is a walking bankrupt too, and turns to the banks to borrow the newly created “out of thin” air money. How is it possible for this three way confidence game to end in anything but collapse, wiping out most of the banks and Federal Reserve Notes, and Commercial bank checking account and saving account debts to the public that we call M2 money supply?
You don’t need to be a CPA to understanding the financial statements of banks, and governments and to see how impossible it is for the huge debt burden to be liquidated other than through default. The only question is when had how the holders of all these promises will see their wealth disappear into the netherworld from whence the debt originally arose, i.e., thin air.
There’s more to the Bund auction failure than meets the eye — such a large shortfall looks co-ordinated as only the big money center banks could. Berlin knows who failed to bid, and is unlikely to be amused. Those banks just burnt their bailout cards.
You might be right, Robert, but some pundits seem to think the opposite. If Germany wants no part of a PIIGS bailout, all they have to do is pull out of the Euro. Then, the remaining countries in the Euro zone could print Euros to their hearts’ content. Germany is trying to have their cake and eat it too. An impossibility.
There’s talk of an IMF bailout, but it is hard to see that working. Let’s say the IMF ‘loans’ $750 billion to Italy. Then, next month Spain comes knocking. Then what? That won’t fly. Not that I can think of a plan that has a reasonable chance of working.
Why doesn’t the IMF and others just write it all off and start over?
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You might want to watch this…
Steve Keen on BBC HARDtalk
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Thanks for the link Tyrone
Initially, I thought ‘what a nut case’ when he started talking about writing off debts. I save (I don’t have a lot put by) and have no debts, so I thought his idea would punish me. However, after watching the whole interview, he actually makes an awful lot of sense.
I certainly agree with him with regards to the system we have now going to cripple ‘advanced’ western economies for the next 20 years if nothing is done to change what we are doing.
And I especially liked his description of banks being ‘parasitic’ in their current form.
Hi David,
Any wiping clean of the slate means that somebody has to eat the losses. It is the effect in these parties, e.g. Banks that makes wiping the slate clean an unpalatable option.
John, great article !
I believe that when this comes to a head there will be a liquidation event that will present the opportunity of a lifetime to buy cheap silver and gold, but you’ll have to be quick before the markets turn to PMs as a safe haven. The turnaround will be quick and exaggerated. Get ready to stack folks.
Great post, thanks.
Why doesn’t the IMF and others just write it all off and start over? The paper value of assets, esp. real estate, is fiction.
The real asset of the world is oil and sustainable daily output is stuck. The world’s economy is no longer free to grow, it’s a zero-sum game. If we don’t all learn to play nice and share like they taught us in kindergarten, then there will just be more war and unemployment and poverty.
Sharing with our neighbors that cross our paths is charity. Forced distribution of one’s hard earned buck in socialism/communisn. Where are you coming from, David? I could SEE my kindergarteners and their families. I could give them of my surplus, as long as my parents approved. Forced distribution is NOT charity and wins no grace for the after life.
Then we shouldn’t have so much oil. Oh – unless it’s okay to start a war for resources. Of course, some might call that theft (complicated by mass murder).
anyway, thanks for the lesson, preacher. By the way, Jesus said, “sell all you have and give it to the poor.” Buddha said, ‘generosity is the virtue that produces peace.’
Maybe sharing is okay. Maybe Ayn Rand was a near-sighted narcissist.
David asked, “Why doesn’t the IMF and others just write it all off and start over?”
That is basically what a prolonged period of high inflation rates is. Or a short period of hyper inflation.
All this debt is unpayable, so it won’t get paid.
Bend over taxpayers, first in Germany & USA, but eventually all countries involved in these bailouts. I firmly believe that if TV did not exists to distract the stupid then the streets would be full of people with pitchforks… nope guns.. demanding this banker bailout stop… but then again American Idol is still on in the USA and XFactor in the UK so all is well… just go about your biz.. .nothing to see here… move along.
Outstanding post, John. What a mess.