Not withstanding all the hand-wringing, the Wikileaks has offered moments of unintended levity and farce. Belgium, for example, was advised that taking some Guantanamo prisoners would be an inexpensive way to buy some clout in the international political economy. Whatever it may be, Belgium (and much of European sovereign debt market) isn't getting much of respect.
In June 2009, the CDS (credit default swap) premium on a $10 million (Dh36.7 million) bond issued by Italy cost 110bp (bp is basis points; 100bp is 1 percentage point), while the German and American bonds cost around 25bp. What this means is the following: the cost of insuring that bond against the unlikely event of some credit event, be it the country defaulting, restructuring or what have you, was around $110,000 to $25,000 every six months.
For a 5-year-long insurance, you would have paid $1.1 million to $250,000 to insure that 10 million bond.
Today, Italy trades at 225bp, France around 100bp, both in excess of 100 per cent increase in premiums.
For bond traders what this means is that yield on these bonds must compensate the increased cost of getting insurance. Resultantly, national treasury agencies have to increase the offered yield on these bonds. This is equivalent to increased future debt obligations. All this is okay, if the world had no alternative assets for investments. However, as of writing this, Dow Jones reports that the Italians sold today 2.5 billion euros with implicit yield of 2.86 per cent as opposed to an earlier 2.32 per cent.
Belgium's treasury auctions as reported by ZeroHedge reveal nothing different either. The bid price for a 10-year Belgian bond has an implicit yield of 3.718 per cent compared to the previous auctions 3.26 per cent.
So, for a 0.945 billion euro issue of Belgian bonds, the investor stands to make an excess of 5 billion euro over the next 10 years.
The situation has only worsened outside the "core" of Europe.
The cost of CDS for sovereign debt issued by Spain and Portugal has risen by 23 and 36 basis points (bps) in a single day bringing it up to 354 and 538bps.
This has come about despite, much publicised, bailout package orchestrated by the European Central Bank.
As Bloomberg reports, a 85 billion euro package was foisted upon Ireland without any concomitant burden imposed on bond holders.
Angela Merkel had earlier suggested for bondholders, with uncharacteristic clarity, "punishment, discipline and severity". But this package has barely assuaged the markets.
As a wag would have it, the indebted are to be saved with more even more debt at unsustainable interest rates (for Ireland at 5.83 per cent).
All of this, increasingly seems, that the real problem is yet to hit the curb. And that problem is Spain. Unlike other bailout countries, Spain has the 9th largest economy in the world, and as Nouriel Roubini instructs, an economy that has over one trillion euro of public debt, and one trillion euro in private liabilities.
There is increasing consensus, especially in the back-alley chatter amongst traders and brokers (the human face behind the electronic herd, if you will), that the sequence of coming collapse is as follows: Greece, Ireland, Portugal, Spain, Italy and UK. (Thereafter, it is anybody's guess.) Some like Niall Ferguson have argued over the past year that continued bailout of small European economies will increasingly "contaminate" into the US and Germany. What is at stake, this unquiet steamroller of debt market fuelled despair, are issues about the viability of the Euro.
For now, it seems the problems have been staved for another day; but as Roubini sardonically notes: "There's not going to anyone coming from Mars or the moon to bail out the IMF or the Eurozone." Whether little green men will do so or not, the CDS premium on Germany has begun to increase as well. If there is one lesson from history it is that the German electorate doesn't look kindly upon blind increase of their debt burdens — especially for spendthrift governments at the periphery of the Eurozone.
There are increasing number of judicial cases that challenge the constitutionality of Germany's participation in the bailout packages. Opinion polls put support at 48 per cent in favour of bailout, 47 per cent against it. Many conjecture, Angela Merkel recently lost the state government elections in North Rhine-Westphalia due to her support of the Greek bailout.
The way the rest of Europe has begun to articulate this debate is by hinting that the euro, and the European Project, is for the Germans to break apart and given up on. Of course, the rest of Europe (along with banks who hold the debt) slyly suggest Germany can save it all.
If only the Germans write a big fat cheque.
The columnist works for a major European investment bank in New York City. All opinions are personal and don't reflect any institutional perspectives.
