I missed this at the end of last week — forgive me, I’m traveling. But on Friday, over at Baseline Scenario, Peter Boone and Simon Johnson explored how the eurozone crisis is going from bad to worse. Some excerpts below …
The big news is France. With sentiment worsening across Europe, France has lost its relative safe haven status – credit default swap spreads on French government debt were up sharply today.
It did not help that the Irish Minister of Finance announced Ireland has 74.2bn euros of guaranteed bank loans, bonds, and systemic support falling due between now and Oct 1. This is around 55% of GNP. It sounds like everyone backed by the Irish government had the “clever” idea to roll over their debts to just before the guarantees expire.
The big losers are Portugal-Ireland-Italy-Greece-and-Spain as always, but Belgium is now in the line of fire, and France is clearly under pressure. The spread between French and German credit default swaps (measuring the relative probability of default) is up – yesterday this was 40 basis points, today it stands at 44 (up from just 5 basis points at the end of 2009; most of the increase is since mid-March, with a sharp acceleration recently). French bonds have become illiquid, with wide bid-ask spreads; not what is supposed to happen in a safe haven. This is going to make the French angry – watch for more market slanders from top French politicians over the weekend; you know they would just love to ban trading in something.
Earlier today the French Prime Minister came out with a quote for the ages:
“I only see good news in parity between euro and dollar”.
XX Sean’s note — As they say on the inter-tubes, OMFG! The head of the French government has come out in favor of euro-dollar parity? France has dropped the P-Bomb?! Now THAT should weigh heavily on the euro going forward. Now we know why the overbought dollar leapt higher on Friday and Monday. The fact that the U.S. dollar is down today only points to temporary exhaustion in the greenback’s rally. It could go higher from here. And gold? Well, gold doesn’t seem to take much of a break at all, does it? Funny about that.
If France favors the euro exchanged for the U.S. dollar at 1 to 1, why the hell would you want to hold euros at 119-120? I’ll tell you what — you wouldn’t!
Boone and Johnson explore the repurcussions that this could have. Go read the whole thing.
Beyond that, I’ll tell you that if the rest of Europe starts doing quantitative easing without Germany’s approval, we could see some really big shifts very quickly. The fear (so far) is that Greece and the other wayward PIIGS would leave the euro to sort out their own financial problems. But if the rest of Europe starts the money printing presses without Germany’s okay, we could see the Germans bid goodbye to the euro on their own — and give a teutonic middle finger on the way out.
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Destined to fail from the beginning. Who’s in charge of financial strategy? One currency, one government. One final step before my homeland (UK) leaves the mess called the eurozone forever. Can`t wait.