Friday, 25 November 2011

Another disastrous bond auction twists the Euro death spiral

 Italy paid a record 6.5 percent today for 6month money far above levels seen as sustainable for public finances.

The auction yield on the six-month paper almost doubled compared to a month earlier, following the failure of  a German bond auction earlier in the week.

Italy managed to raise the full planned amount of 10 billion euros (8.6 billion pounds), at  the highest borrowing costs since it joined the euro. Investors are scared and bond yields hit record highs on the secondary market.

Yields on two-year BTP bonds soared to more than 8%in response, a euro lifetime high, despite clear  purchases by the European Central Bank.

The ECB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its public reluctance to prop up high-debt eurozone governments, its bond-buying programme lacks conviction in the market's eyes.

These yields threaten Italy's planned gross issuance of 440 billion euros for 2012 as interest payments on the country's  debt stock rise. Maybe Mario is not so super after all!

The Euro seems to have entered a self fulfilling,  self induced death spiral. Only the ritual electoral suicide of Dr Frau Merkel falling on her pickelhauser spike and allowing the ECB to buy Euro sovereign debt in gigantic quantities can now save this ill conceived and deeply flawed currency and that will only give a temporary respite.

Two big mistakes were made by the Eurocrats. Forcing banks to mark sovereign debt to market instead of using its par value immediately confirmed sovereign debt was any thing but risk free. Second the decision to force banks to accept write downs 'voluntarily' on sovereign debt to avoid triggering Credit Default Swap contracts and hence avoid a public default made these CDS contracts worthless. Banks can no longer use them to insure against sovereign bond losses so banks have decided not to hold these bonds at all. The ECB have been the only buyers and must by now have a huge pile of crap Eurobonds on its balance sheet.

The suggestion by the FrancoPrussians that Greece might be kicked out the Euro let the cat out of the . bag. Why stop at Greece? Why not Portugal, Ireland etc. Currency risk was now on the banks agenda big time. Their response? Cut lending to the Eurozone as fast as possible.

Truely a cock up of Napoleonic proportions. Remember what happened to his Grand Armee in Russia, 500,000 men at the start of his Russian campaign and 10,000 at the end. Let us hope the great EU project meets a similar fate.

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