On Friday I pointed out the rise in the PIIGS 10 year bond rates showing contagion was spreading to Spain and Italy. I copy Friday's cob rates I posted below plus today's Monday 11th July rates. Bund spreads are in brackets showing how much more expensive the PIIGS rates are compared to Germany:
Friday 8th July Monday 11th July
Greece 17.04% (14.20) 17.19% (14.52)
Ireland 13.13% (10.29) 13.62% (10.96)
Portugal 13.05% (10.21) 13.28% (10.61)
Spain 5.69% (2.85) 6.08% (3.41)
Italy 5.28% (2.45) 5.72% (3.05)
Now all the PIIGS rates have risen substantially today but note how Frankie Dettori on Italy is making a late run on the rails with a 44 basis point move! This means that both Spain and Italy are paying more than twice as much as the Germans for their funding. Bad news as they both have a lot of serious funding coming up in the next quarter and Italy is the third biggest economy in the Eurozone and Spain the fourth biggest.
Its crunch time for Dr Frau Merkel. She has two choices. Let Greece default and accept Portugal will soon follow with an increasing possibility of Spain and Italy following and admit the great Euro project in its current EU wide incarnation is dead. Or, underwrite the Greek debt and commit the German taxpayers to pay for these profligate Club Med countries indefinitely. Greece they can fund plus Portugal as well but not Spain and Italy.
Its all looking a bit Wagnerian, Gotterdamerung!. It needs some pure Eurozone youth to emerge from the forest and save the EU. Its a pity Gordon the Brown engine is not available and DSK is still in the dog house. There is never a super hero around when you need one as Ronnie Regan used to say.
The good news for the Krauts is their rates are falling in absolute terms which makes it even easier for them to win Bombardier type contracts with the help of cast iron Dave..