Tuesday, 19 July 2011

08:28 – Spain auctioned a couple billion worth of short-term bonds today. They kept the face value low and the maturities short, hoping to cherry-pick low interest rates and thereby demonstrate that the market still has confidence in Spanish debt, which it doesn’t. Even with the low face value and short maturities, they ended up paying nearly a full percentage point more than they did on their last auction of similar bonds a month or so ago. That bodes very ill for future bond auctions for Spain, and particularly for Italy, which has a huge amount of debt that needs to be refinanced in the coming months. The next Spanish bond auction is set for Thursday, the same day the EU holds its crisis meeting. That auction is for long-term bonds, which are likely to sell at disastrously high interest rates, if at all.

Lab day today.

12:12 – Merkel says that nothing that happens at the summit meeting Thursday will solve the Greece crisis, and she’s right. But I think what she’s really doing is signaling that, as far as Germany is concerned, enough is enough. All of the “solutions” proposed thus far involve Germany paying the lion’s share of the costs, and Germans are tired of being sucked dry to prop up a poor southern fringe EU country that’s going to fail no matter what happens. Germans rightly consider any additional funding provided to Greece to be good money after bad.

At this point, I really don’t see any alternative to the Eurozone collapsing into fragments. Even if the Greece problem were solvable, which it isn’t, Greece is the least of the Eurozone’s problems. The gorilla in the room is Spanish and particularly Italian debt, hundreds of billions of which will need to be refinanced in the coming year. There is simply no way that Germany can fund that effort, and any money it throws down the Greek rat hole now is simply damaging its future prospects. The real question is whether Germany will opt in the relatively near future to abandon the Euro and return to the Deutschmark, or whether Germany will join with France, the Netherlands, and other relatively stronger northern economies in a new Eurozone. My guess is the former. Germany was never really happy about having a common currency, and events have proved them right.