The ECB is coming under heavy pressure from Eurozone banks to start buying Eurozone sovereign debt particularly that of all the PIGS. You can give this fancy names like Quantitaive Easing, Debt monetisation but its just the Robert Mugabe solution of printing money.
Yesterday the 10 year bond spread in basis points to Bunds closed at:
Portugal 428, Italy 159, Greece 1038, Spain 181.
The Greek spread implies a significant market expectation of a default. If Greece defaults the pressure on Portugal will be irresistible and the ECB will try to hold the line at Spain. Almost the Peninsular War lines of Torres Verdas revisitited but Trichet is no Napoleon and who is the markets Wellington.
Who do you want to believe Barroso's hot air from yesterdays finance ministers meeting or the markets?
The Euro continues to sink against the US dollar. Its now at 1.28 below the psychological 1.30 and Sterling has dropped to 1.48 below the 1.50 level. Sterling has strengthened slightly to 1.16 against the Euro showing the market are currently focussed on Europe. They may switch to the UK on Monday if the markets don't like the Clegg Cameron Brown shenanigans. I am glad my former colleague from the BoE, Matthew Hancock has just been elected as a Tory MP. Matthew is behind most of the Tory finance reform ideas and unlike Wee George knows what he is doing.
World wide Equity markets have taken a big hit as fears of the Eurozone problems spreading to the US and Far East like the Lehmann's bank problems did two years ago. The FTSE dropped 2.6% yesterday, the S&P 1.5% and the Nikeii 3.1%.
UK 10 year yields have risen 34 bps in the last month and are set to blow out further. Gilts and Sterling are looking very vulnerable. Its all about political economics and I have little faith in our political leaders.