How the latest emergency euro summit addresses the sovereign debt crisis

Markets’ initial reaction to the latest EU emergency summit has been positive. Risk assets are trading up, risk-sensitive currencies are up, European bank stocks are up, and the broader stock market is as well. This relief rally is unexpectedly large. The bigger picture is quite a bit more downbeat. This summit does not address the core issues of the European sovereign debt crisis and is just the latest in stopgap measures on the way to a real fix to what ails Euroland.

Let’s step back a moment and look at how we got here

Chart of the day: Greatest Credit Deterioration Focus – Belgium, Spanish banking

Here are a few charts from the credit default swaps market based on 5-year CDS. Here’s what I see

Holders of Sovereign Debt

Here’s a great chart just released by the International Monetary Fund for Greece, Portugal, and Ireland as well as Japan, the US and the UK. Note that almost half of the US federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors

Short Note on Euro Zone Success: Ireland?

At the beginning of the year, the 60-day correlation between Irish and Greek 10-year yields was above 0.90. Today, the correlation stands at -0.42. At the same time, Irish 10-year bonds yields have become significantly more correlated with German bund yields. That 60-day rolling correlation is near 0.85 today. As recently as late July, Irish 10-year bonds were inversely correlated to bunds (-0.90). This is not to say that Ireland is a safe haven, but

Chart of the Day: Eurozone wage growth, pre-crisis

10% ‘internal devaluation’ in Germany took eight years. We are talking now about 20-30% wage and price cuts in Greece and Ireland. How realistic is that

Ireland: Is austerity enough or will we see haircuts?

It is high time politicians in Berlin to started to recognise that fiscal austerity is not the be all and end all of the policy issues they now face. Ireland is applying fiscal austerity, but this alone may well not be enough. A better distribution of the pain needs to be found. As the IMF itself notes in its latest staff report: ”there is a strong sense that burden-sharing between taxpayers and creditors for the cost of supporting the banks has been unfair”

Euroscepticism

It would easy to say something like, “The euro is an abomination and the peripherals should simply leave or be tossed out of the euro zone.” But, we are here now. The political imperatives for closer European ties that created the single currency are still with us. And the negatives of abandoning it are many, both politically and economically – in the periphery and the core

The widening European sovereign debt crisis

Euroland is coming apart at the seams. Belgian/Bund spreads are now also over 200bps along with Italy and Spain. Belgium has just entered the periphery and France is not far behind

Felix Zulauf on the inevitability of further crisis in Europe

Felix Zulauf spoke to Barron’s Alan Abelson about his thoughts on the European sovereign debt crisis now that Greece has received its second 100 billion euro bailout. Here I discuss what Abelson says about the conversation and why I think it means a state of permanent and rolling crisis in the euro zone

What the European Greek debt deal means

This step will calm markets – for how long is anybody’s guess. Nevertheless, the budget cuts that this deal requires must be rapid in order to try to calm markets by maintaining the fiction that Greece is not insolvent and that the budgetary crises in Portugal and Ireland are less sever than they are. This approach is another version of extend and pretend and will have the nasty side effect of slowing growth in the euro zone considerably. Muddling through means deepening crisis for the euro zone. My hope is that Europe will be ready to address the medium- and long-term issues when the crisis flares again

Europe: Contagion and Containment

Tolstoy tells us in the first line of Anna Karenina that “Happy families are all alike; every unhappy family is unhappy in its own way.” This is directly applicable to Europe. It is easy to tar all (growing) peripheral countries with the same brush, but that risks over simplification and the faulty analysis may generate poor investment decisions

What Happens Next?

The question is not whether Greece will default but what will happen once it has. If Greece defaults but stays in the euro, not only will it not solve the underlying lack of competitiveness, but markets will immediately turn their attention to Portugal and Ireland and force those countries to default, and once they fold, Spain and possibly Italy will be next, so a Greek default on its own could quite possibly make matters worse for everyone. If Greece defaults and exits the euro at the same time, the market reaction won’t be much if any different to begin with, but things may actually take an interesting turn in one particular respect. Once the people of Portugal, Italy, Spain and Ireland see how the Greek economy actually benefits from the exit, they may in fact demand an exit in their countries too. It is therefore fair to say that a Greek default, with or without an exit from the eurozone, achieves nothing if the aim is to keep the eurozone intact. However, there is another way forward