Monday, 18 July 2011

Eurozone crisis deepens - no way out

Today's piece by AEP in the DT is headlined, "An orderly break up of EMU is the wise way out of the eurozone crisis". His thesis is split the Eurozone in two with Club Med etc keeping the ECB and a currency called the Euro which would instantly sink on the Forex market to its correct level and the hard core Germany plus I guess Austria and Holland would have a new currency which would be like the Swiss Franc. Can I suggest it is called the Reichsmark. It would certainly rival the Swissie as a safe hard currency.

The plus point is the PIGS would be able to repay their Euro denominated loans in devalued Euros. Great for them but not so good for those banks in the new Reich who still hold a lot of PIGS paper. The other negative from Dr Frau Merkel's view point is German industry would be saddled with an appreciating currency raising the price of their exports. The German's did very well out of an undervalued currency after the war up to 1980. The soft Euro has been a godsend to them. Merkel would like to keep it that way at least until after her re-election.

Things today worsened on the bond markets so I update my 10 year PIIGS' bond yield table with as always the spread to bunds in brackets:

              8th July                11th July             15th July             18th July

Greece  17.04% (14.20) 17.19% (14.52)  17.71% (15.02) 18.23% (15.57)

Ireland   13.13% (10.29) 13.62% (10.96)  14.27% (11.58) 14.45% (11.79)

Portugal 13.05% (10.21) 13.28% (10.61)  12.93% (10.24) 12.84% (10.18)

Spain         5.69% (2.85)      6.08% (3.41)     6.07% (3.38)     6.32% (3.67)

Italy           5.28% (2.45)      5.72% (3.05)      5.77% (3.09)    5.99% (3.34)

Not a pretty picture when the squabbling mid Europeans Finance ministers meet on Thursday. Looks like Greek bonds could soon be at 20%! The only currency the Euro is holding up against is, yes, Sterling. Bad news for those UK MPs planning a holiday in Euroland but of no consequence for our wealthy MEPs who are of course paid in Euros.

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