Germany's Opinion Of PIG Debt

Apr. 05, 2012 11:38 AM ET
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There is a renewed sense of calamity surrounding Europe. Greek 10 year bonds are trading around 22% (this is after being saved mind you), Portuguese yields are above 12% (which is not their local highs), and Italian and Spanish yields are quickly escalating through the 5% range this week. Though not at their local highs, Spanish yields are trading at the same spread to German yields that they were back in July of last year when outright yields were at their local highs. However, the most significant development comes from the German and Austrian central banks, as they have declared that they will no longer accept Greek, Portuguese, or Irish bonds as collateral. I don't know what type of economic union Europe thinks it has, but not accepting collateral of countries is a major statement. First and foremost, it tells you the opinion that Germany has for the credit quality of the rest of these countries, but most importantly, it tells you what Germany thinks of the solidarity of the backstop of the rest of these countries. For folks to think that the payout of taking on the debt of these countries is worth the risk, they have to believe that these countries have the ability to service their debt or that the rest of the European Union will come in, provide liquidity, provide capital assistance, and make sure the debt is paid.

The largest, most important player in the European Union, the one which all others will ultimately look to in order to prop up this experiment, is very clearly signaling what will comprise the backstop, and it is not them. They don't even want to hold the debt of these other countries as collateral, much less make sure the debt is actually paid. The timing of their decision is what is most puzzling however. Why now? Why after all this support has been pledged, the ECB has printed money, created new ways to bail people out. If this move had been taken before all of the money printing, I would definitely say that Germany was drawing a hard line and the EU was about to come undone. Rather, it is possible that this is Germany's way of ensuring austerity measures are followed, and the governments of the EU will come in and continue to support the other countries just as they have done. Regardless, it is a very strange investment world when the focus is not on the growth and valuation of individual companies, but what government bureaucrat will decide which insane measure.

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