“Germany is the core, everything else is secondary”

The Wall Street Journal’s Matt Phillips describes the turmoil in European sovereign bond markets. He says some traders tell him that they now consider countries like France a part of the periphery and are pricing it as such. This risk-off sentiment has spread throughout the euro zone to countries like Finland which is the only country in the euro zone except Luxembourg which is both AAA-rated and meets all of the Maastricht Treaty requirements.

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Sentiment Deteriorates Further After Tepid Spanish and French Auction Results

EuroStoxx 600 is down over 1%, EZ bond yields mostly higher after Spanish and French bond auctions. Financial market stress (banking and credit) continues to intensify amid lack of progress on debt crisis. UK October retail sales saw unexpected strength; Singapore’s Oct. non-oil domestic exports plunged

Spain Another Pain

Pressure is mounting on Spain. The 10-year yield today is essentially back to where it was when the ECB broadened its sovereign bond purchase scheme to include Spanish and Italian bonds. On Oct 27, the 10-year yield was near 5.33%. Today it is 100 bp higher. This is not a very conducive environment for tomorrow’s new benchmark offering (up to 4 bln euros of bonds that mature in 2022)

Ominous

This shouldn’t be happening after this weekend’s good political news. The spread widening is weighing on France who will be on the hook for their banks who are heavily exposed to European sovereigns. Where are you

Five uncommon observations about the European debt crisis

The escalation of the European debt crisis and mounting evidence of new economic contraction has increased the scrutiny on the region. Yet it seems like many observers may be failing to grasp several important points, including the nature of the new governments, the Italian challenge, pressure on the ECB, risks of a euro zone break up and the coming election in Spain

News Links: Down with the Eurozone, It’s not about Berlusconi

Down with the Eurozone – Nouriel Roubini – Project Syndicate For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone’s consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of

Paul Krugman gets it

Paul Krugman show he understands the sovereign debt crisis

Italian contagion pushes Spanish spreads to near-record 414 basis points

We are experiencing a European bond market crash. There’s not much time left. Make your trades now because a policy response is imminent; I’m thinking by Monday morning

Sean Egan says Spain could be the next domino in the euro zone crisis

“If a country isn’t growing, it’s debt is growing as a result. So, any interest beyond, let’s say 2.5%, is a problem. And with Italy’s growth shrinking, as a result of the austerity measures they’re putting in place, we’re beyond it. Basically if it doesn’t come down in the very near future, we’ve gone from the Greece problem to the Italy and possibly Spain problem.”

Italy’s Political Drama: Tuesday Climax?

Assuming that the Greek and Italian political situation stabilize, the focus may shift back to the Iberia. The risk is that the new Spanish government will report a larger budget deficit and weaker finances in general than the outgoing government has recognized. Spain has three bond and four bill auctions before year-end.

Portugal needs to approve the 2012 budget and this will require acknowledgement that it is missing this year’s targets. While the euro zone as a whole only now looks to be entering a recession, the Portuguese economy contracted in both Q1 and Q2 and is likely to have contracted in Q3, when the preliminary data is reported on Nov 14. The Portuguese economy contracted in 2008 and 2009 before expanding last year. This year the contraction has resumed. The consensus forecasts calls for continued contraction in 2012 and 2013.

Such a bleak economic outlook does not appear conducive to political stability, let alone stabilizing debt situation and reassuring investors. If investors have been asked to “voluntarily” asked to forgive half of what Greece owes and accept a lower coupon, what will private sector investors in Portugal be asked to forgive

Roger Bootle on the European Crisis Deal: Get Austere or Die Trying

Here’s Roger Bootle talking to Bloomberg’s Maryam Nemazee about the deal hammered out yesterday to ‘save Greece.’ He is quite sceptical. First, the 120% debt to GDP figure that the deal is predicated on reaching is still high and assumes a benign economic environment. Bootle believes these assumptions are rosy given the negative impact fiscal consolidation will have on growth.

Separately, I have seen a number of other threads on the crisis. Most of the commentary has been negative. One would never know this given the incredibly bullish reaction in the markets. Here are the most interesting threads

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