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[Premium] Europe is on the brink of something very big

Edward Harrison — Wed, 16 May 2012 10:20:17 +0000

Euro zone bond markets have come completely unhinged this morning. Spanish 10-year yields have hit the highest level this year at 6.5%. While Italian 10-year yields broke above 6% for the first time since late January. Meanwhile, German yields have moved to a record low of 1.44%. We are now back to levels of stress we last saw during the Italian crisis in November and December. However, this time policy space has narrowed considerably. In short, Europe has reached the critical breaking point

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Spiegel: Kohl-era German documents reveal euro formation was about politics

Edward Harrison — Wed, 09 May 2012 12:00:31 +0000

"The German government has, for the first time, released hundreds of pages of documents from 1994 to 1998 on the introduction of the euro and the inclusion of Italy in the euro zone."

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Hitler and Mussolini rose to prominence as a result of pro-cyclical government economic policy

Edward Harrison — Fri, 04 May 2012 10:56:57 +0000

In 1921, the US, a creditor nation, was fighting boom time inflation and turned to 'austerity' to defeat it. Europe on the other hand was seeing a debt-laden deflationary episode after the Great War. This episode has historical lessons for today's leaders

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(Premium] There will be more defaults in the eurozone

Edward Harrison — Fri, 20 Apr 2012 18:54:22 +0000

In last week's weekly newsletter, I explained why Spain was in big trouble. Today I want to present the full context euro zone-wide and why there will be more sovereign defaults to come in the euro zone. This will be a very comprehensive must read post for anyone interested in the euro zone

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[Premium] Daily Commentary: On Auction Results from Spain

Edward Harrison — Thu, 19 Apr 2012 12:33:19 +0000

Today’s big news was the bond auction in Spain. Spain’s auction went off without a hitch but at a cost. Spain sold 2.5 bln euros ($3.3 billion USD). The Spanish Treasury sold a 1.1 bln euro bond maturing 31 Oct 2014 (average yield: 3.463%, bid-to-cover: 3.3 vs 2.0 at previous auction in October). The Treasury

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LTRO operation is pushing Spanish banking system closer to collapse

Edward Harrison — Thu, 12 Apr 2012 18:52:27 +0000

I thought I'd point out that the already severely undercapitalised Spanish banking system is being crushed by the spike in Spanish sovereign yields. I continue to expect Europe to continue the extend and pretend approach, creating volatility and crisis. But in the end the issue will always be the same as to who writes the check

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When Virtuous Cycles Turn Vicious

Marc Chandler — Tue, 10 Apr 2012 17:50:47 +0000

The LTRO's provided more than 1 trillion euros of liquidity. An under-appreciated aspect of the virtuous cycle, was the bank balance sheets improved not just because of cheaper cost of capital, but because there was a significant rally in the banks' assets--ie sovereign bonds. Now things are in reverse and the virtuous cycle is becoming vicious

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Chart of the Day: Flight to safety – German Bunds edition

Edward Harrison — Tue, 10 Apr 2012 16:00:39 +0000

The German 2-year note has dropped below Japan's for the first time ever, with the German 2-year note yielding 0.109%, a record low. Japan's 2-year note yield is 0.111%. Meanwhile, the 10-year bund is at 1.638%, nearing the record low of 1.636% from September

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Italy’s debt is its biggest obstacle but Spain’s budget lacks credibility

Marc Chandler — Tue, 03 Apr 2012 16:18:00 +0000

The more Spanish officials talk about the budget the less credible it seems. The 10-year yield fell 11 bp on Friday when the budget first presented before the weekend. Now as more detail emerge as it goes to parliament, 10-year yields are rising. Italy reported that the Q1 state sector deficit declined by about 10% to 28.2 bln euros in Q1. This was completed due to the results in the month of March. Contrary to the conventional narrative about fiscal profligacy on the periphery, Italy's fiscal policy has been among the tightest in the euro zone as it is one of the few countries that can point to a primary budget surplus. But Italy has to run hard to stay in the same place

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Disappointment in Core, but Some Positive News in Periphery

Marc Chandler — Thu, 22 Mar 2012 14:28:00 +0000

The shockingly weak euro zone flash PMI, especially the sub-50 reading for German manufacturing, is the main focus today. New orders have been weak and the Bloomberg consensus does expect the euro zone economy to contract not only in Q1 but in Q2 and Q3 as well. Many participants seem to have confused the dramatic equity market rally in Q1 and reduced tail risks with economic strength

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