Guest Post: The (Euro) Answer, My Friend, Is Showing In The Bond Market

Tyler Durden's picture

Submitted by Alexander Gloy of Lighthouse Investment Management

The (Euro) Answer, My Friend, Is Showing In The Bond Market

Politicians and non-elected maquinistas are still trying to figure out how to make the still-borne EFSF (European Financial Stability Facility) walk, or better, fly. A month after the “miracle of Cannes”, the trumpets of victory over the debt crisis have fallen silent. Instead, the first EFSF bond issue after the G20 summit ended up in disaster (reduced, postponed, not fully placed).

If you thought this experience was a lesson on how not to fight a debt crisis you were wrong: more debt, leveraged via a complicated structure, insured by itself, completely unfunded. Peter Tchir made the effort to go through the “EFSF guidelines”; his verdict: “beyond comical”. I am getting tired of hearing about new “miracle cures” every other day. It is such a waste of time. Like a pal, who, every other weekend, wants to introduce his “new” girlfriend and you wonder if it is worth to be nice and strike up a conversation.

The house is on fire, but politicians are discussing if buying a second dog would make the property safer, and what kind of collar it could possibly wear.

Should we believe ECB’s Noyer when he says (11/28) “The economic situation in Italy is not that bad”? Why then, may one ask, did Italy prefer not to release its Q3 GDP data (was scheduled for 11/16)? Is the third-largest government bond market on earth wrong in yielding 7-8% across the curve?

No, it is “not that bad”. It is horrible.

Take the rumor about EUR 400-600bn IMF help for Italy (strategically leaked on a Sunday). What does it say about Europe if the IMF has to bend over backwards to bail out one country for 12-18 months?

It says: “Europe is bankrupt and cannot save itself”.

Remember the latest product innovation from the IMF, announced not even a week ago? “Credit lines” of 500% of a country’s quota. Spain and Italy would be able to receive $30-60bn – a joke in the big scheme of things.

The program was already obsolete a few days after its inception. This is how fast the fire is burning through the attic – and the owners are still sleeping.

If the EUR 600bn for Italy materialized, Spain would feel entitled to some help, too. But Italy has first-mover advantage. Hence the ominous warning from the incoming Spanish government to “mull financial options without ruling out an application for international aid” (11/22).

Once Italy and Spain fed at the trough, it will be empty. The poor Portuguese will be left behind, as it will be every man for himself.

Greece has been reduced to a mere side-show. The only question being if the next tranche (EUR 8bn) will be paid out before Greece declares a “temporarily suspended debt service” on December 16 as EUR 12bn of debt matures. Even assuming the EU/IMF help flows, the cash drain, together with a monthly fiscal deficit of 1bn+, would be 5bn.

As usual, the bond market has already an idea on how this will pan out. Looking at various yield curves we get the following picture:

  • Greece is “off the chart” (in the “toast” zone)
  • Portugal will not make it as debt and interest is not sustainable and the EFSF struggles to raise bailout funds.
  • The “soft Euro-zone” could survive by aggressive monetarization of debt by the ECB – once the German hardliners quit. Inflation would probably follow in a few years, but that is another question.
  • The “hard Euro-zone” would consist of Germany and the Netherlands. They unilaterally quit the Euro-zone and introduce a pegged currency pair.
  • France is really the only unsolved question in this puzzle. Bond yields have peeled away from Germany a bit too far. Historically, France was a “soft” currency country with frequent realignments of exchange rate under the European ERM (Exchange Rate Mechanism). Given the strong political ties France will probably be forced to stay married to Germany, but it will be an unhappy marriage, with an eventual break-up at a later date.
  • I have included Hungary just out of curiosity, since their love-hate relationship with the IMF is slightly entertaining.

Sometimes I get the impression Germany’s insistence on austerity is in fact an attempt to escalate the crisis. The Euro-summit on December 9 will bring treaty changes that allow countries to exit the Euro. Everybody assumes this is to “punish” deficit offenders, when, in fact, it is Germany’s carefully crafted exit from the Euro-zone.

The remaining countries will be free to print they way out of looming insolvency, albeit at the price of having to figure out who will pay for the substantial losses on PIIGS bonds parked at the ECB.

Germany will see its currency gradually strengthen, and temporarily suffer from declining exports, but Germany has lived well with a strong currency before. The alternative, a complete melt-down of the Euro-zone, is definitely less appealing.

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Carlyle Groupie's picture

You'll need a few of these once we get into the Toast Zone.

Good price too for a 7.62, stock up now because soon you will not be able to buy them. Thank you Patriot Act.

Stumpy's picture

I don't know much about firearms and even less in semi-auto weapons. But I would have expected this baby to cost maybe 2½ times more.

Carlyle Groupie's picture

Yes it's a good price. It's for long range big stuff like Zombies coming down your driveway in Bedford Hills.

While you're at it throw in a box of ZombieMax. Do yourself a favor.

Stumpy's picture

The type of thing that do not go through the customs very well.

Carlyle Groupie's picture

Unless you switch it to full auto and make a run for the exit doors. You got to be quick and agile like a cat.

gangland's picture


jaffa's picture

The economists views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of in line data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Thanks.
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BandGap's picture

I'll stick with the Mossberg and Remington shotguns I have.  Both costing less and requiring less aim.

ToNYC's picture

You'd be more like a real human if you thought of saving seeds than the false meme of protecting life by killing it to save yourself.

topcallingtroll's picture

Dont you know this whole thing is an exercise in camp?

hannah's picture

"Inflation would probably follow in a few years,"......a few years...hahahahaha...oil went from $33 a barrel to $140 in a f'ing heartbeat but the ecb can print and it will take years for inflation to appear.....DREAM ON...!

jeff montanye's picture

i agree.  particularly in the eurozone as that fiat is under active attack and holders will spend rather than take their chances on a deteriorating future.  see the relevant highlighted paragraph (inflation/fiat) in the always useful hussman essay:


Sounds like a horrible family Christmas where you have to get your drunk uncle a present but you don't really want to. 

slewie the pi-rat's picture

he probably just wants to sing!

Dr. Richard Head's picture

I wish I were the Uncle. I just realized I am France. Fucking cunt threw 20 fucking K on credit. All to buy trinkets in order to sell them on eBay. Or does that make me Germany. Who know? Fucking cunts.

Bring on the divorce....or reset....or default Just fucking cut bait already.

spz_trader's picture

Honestly, the rate of acceleration into the abyss for euroland is absotlutey mind boggling. To use the house fire metaphor it as if there are cans of gas up in the attic every two feet. 

BKbroiler's picture

true, parabolic. If Greece caused this much trouble for Europe, then the European crash should easily annihilate the global Ponzarelli.  All that's left to see is the order of bubbles created from smart money evading the black hole by inflating temporary safe havens.  Gold and farmland doubled and Jim Rogers is telling us to become farmers. We're all greek.

Spitzer's picture

What is so bad about default ?

What does it say about Europe if the IMF has to bend over backwards to bail out one country for 12-18 months?

it says that the ECB isn't stupid enough to print and the Fed is.

Iwanttoknow's picture

I wanted to give you a thousand up arrows.

jeff montanye's picture

default, aka orderly debt reorganization, is the only way out of this global mess and toward an organic recovery.  again the esteemed hussman:

ToNYC's picture

The FED is not stupid. Debt is the medicine that breaks the serfs so they remain fragmented digestibles for the corporate controllers of our global-brand.

riley martini's picture

 They could always do another bank stress test to trick the minions into buying bank stocks . The Federal reserve is starting a new round of stress test  (sales pitch) to show the strenth of the TBTF banks .  Could a stress test for bonds be in the works.

Schmuck Raker's picture

Germany leaving is the most plausible scenario of all that are floating about.

Spitzer's picture

Is Texas leaving the dollar too ?

tim73's picture

Dollar zone is obviously not optimal! All Americans should be like busy New Yorkers or it is not going to work.

topcallingtroll's picture


The rest of us americans are happy to be subsidized by New York and New York is happy to make the transfer payments to us so we can retire early

ToNYC's picture

Texas left the dollar a long time ago for the black gold in the ground. Not much said about the good work the Texas Railroad Commission protecting the good old boys after LBJ grabbing the wheel.



Schmuck Raker's picture

Texans don't have the courage to actually leave the Dollar.

Fortunately, the Dollar is involuntarily being replaced by the Peso.

The rest of us can only hope that we will continue to have access to the world-class text books that the Texan education market has elevated to a position of  standard fare for the lesser '49'.

bank guy in Brussels's picture

Interesting to consider, that Germany might be secretly plotting its own major departure from the eurozone as the major step to resolving the euro-crisis.

Picking up the theme of Ambrose Evans-Pritchard in the UK Telegraph, that this is the best way out, as it is much cheaper for Germany to recapitalise its own banks (which would be bankrupt from holding GIIPS debt), than it would be to bail-out the whole euro-zone.

Such a secret plan by Germany, does give an explanation of why Germany has been so bizarrely obstructionist about any euro-zone rescue plan, or kick-the-can-down-the-road plan, why Germany does not care that the EFSF is so comically goofy and ineffective in its arrangements.

And above all, why Merkel is selling, or pretending to sell, the absurd plan where other EU countries will consent to have their economies managed by foreign commissars from Brussels or Berlin. That is just a foolish recipe for mass euro-zone rioting and revolution, and Merkel is likely clearly advised that this would be impossible to sustain against millions of European citizens in the streets.

But Merkel speaking such absurdity, is comprehensible if she secretly plans that Germany will leave the euro shortly.

So it does make sense, as Alexander Gloy of Lighthouse Investment Management writes above:

« Sometimes I get the impression Germany’s insistence on austerity is in fact an attempt to escalate the crisis. The Euro-summit on December 9 will bring treaty changes that allow countries to exit the Euro. Everybody assumes this is to “punish” deficit offenders, when, in fact, it is Germany’s carefully crafted exit from the Euro-zone.

The remaining countries will be free to print they way out of looming insolvency, albeit at the price of having to figure out who will pay for the substantial losses on PIIGS bonds parked at the ECB. »

Ghordius's picture

You nearly lost me at "Ambrose Evans-Pritchard in the UK Telegraph"

No, the "German Game Plan" is different. While they do want to keep as many options open and they do plan for possible exits, the main thing you have to keep in mind about the German Political System is: avoid blame. This is very important for the German Political Psyche: don't be the one that authorized blatant monetization. Don't be the one that left the others in the rain. Don't be the one that kicked the others directly out of the boat. And the insistency on "living by your means" is just German "frugality" and experience from history. The "absurd plan" is just "absurd" in the view of someone that is not willing to get off the booze... Germans want a sustainable, long-view solution and are willing to brake until this comes along - meanwhile "Realpolitik" makes them join the harebrained EFSF scheme.

The British View is the complete opposite: do something - even if wrong - so that markets are not shaken. It is the view of a country living off paper markets (exaggerating, but not much), contrast this with Germany living from (mainly) physical products. So Brits want bailouts, the "Continentals" prefer debt-restructurings (a nicer word for saying defaults). The MegaBanks endorse the British View, as of course Uncle Sam.

The rumor mongers' pitch that Germany is trying to "insist on austerity as an attempt to escalate the crisis" is perfectly tailored to get to the soft underbelly of the German Psyche, including FT's Wolfgang Münchau's articles stating there are only a few days left for action before there are no options left.


One little reminder: if Italy, France and Germany don't lose their substantial gold reserves in the process to all the troubles ahead, they still have the "fall back" scenario of issuing one or several new currencies - gold backed if necessary.


To summarize: whatever the Germans are going to do, they are not going to do it alone.

Catflappo's picture

If you are calling one Toast and one soft and one hard,   shouldn't it really be Toast, Bread, and Stale Bread ?

tim73's picture

"The website you were trying to reach is temporarily unavailable."

Real light house, not paying their website bills even.

Eurozone is in much better position than fubared USA, which is a total car wreck. 1600+ billion dollar budget deficit, borrowing/printing more than 40 PERCENT of the budget, 135 billion dollars per MONTH.

Then this so called "supercommittee" tried to save about that ONE monthly sum PER YEAR for ten years. They could not even agree on THAT! Pathetic.

Dr. Richard Head's picture

Like the organ grinders of yore. Pockets will be picked by monkeys until one pays no attention to music.

Proudley tone deaf since 07. No more credit needs. Out of the stock market. Physical stacking...but that fucking cunt charged TWENTY FUCKING K FOR SHIT TO SELL ON EBAY. FUCKING CUNT.

tim73's picture

Yanks, just keep on talking down Euro, it is almost at optimal zone for German and other Northern Euro exporters, 1.25.

You can do it! Give your best shot! Just a little bit more, give your doomiest talkjob you can muster.

TheSilverJournal's picture

The author is giving waaayyyyy too much credit to the omniscience of the bond market. If the bond market had a brain, all bonds of basically every western country would be worthless.

Here is a goodie: "Germany will see its currency gradually strengthen, and temporarily suffer from declining exports, but Germany has lived well with a strong currency before."

Obviously the author doesn't understand money, because a strong currency is good. Weak currency are terrible, just look at Zimbabwe or whatever else currencies got so weak that they became worthless. 

Börjesson's picture

This post leaves me with one big question: Did they deliberately run over a trumpet for the single purpose of illustrating the article?

IQ 101's picture

Besides the obvious laws of math and markets , the laws of nature must also be considered in this' delighted in' creep towards globalism.

You can not tether Sharks to Dolphins nor Greeks to Germans, the ancient histories will not allow it, yet none of this is considered by the great analysts who pull the levers.

Firstly, they desire strongly, to be left alone, each in his natural role and domain. There nature, unchangeable by any force upon this Earth.

Secondly, Ancient animosities and aversions, formed over millenia, will not be forgotten by the addition of Chum to the water, or food stamps or united Negro colleges.

Equality is a myth, a dog is not equal to a Cat, a Rat or a Trout, yet each has a role to play ?

a Woman from Portugal is nothing like a Woman from Paris.

This Euro Socialist Karl Marxy monkey fucking a foot ball is about to rip this world apart because the generous leaders who run the planet have got their heads up their asses.

To wake up every morning and wonder if you can make a few more Bernanke Bucks by shorting NetFlix only prolongs the pain.

Get out and stay out.  Strong Delusion. Gooooog that.

Georgesblog's picture

The EFSF reads more like the script for a Monty Python skit. They've all been sacked, and don't know it. They show up for work, and talk like they're important.

whirlybird rules's picture

Why wouldn't they show up?...  fabulous food, the best wine, 4 star hotels, beautiful clothes, everyone you've hooked up to your gravy train kissing your ass!  

You just got another visitor to your forum.

ViewfromUndertheBridge's picture

That was Seinfeld...George, you should know that one.

tkinfo's picture

Consider the Iceland Solution. You either save the nation and lose the banks, or you save the banks and lose the nation. I'm thinking Save The Nation will win out. Why do anything other then let the natural political forces shape this outcome? You gain nothing by getting in front of the idea, so just let it happen.

TheSilverJournal's picture

And another thing, with all of the debt of other European countries that German banks own, Germany will go bankrupt right along with the rest of Europe if they tried to leave the Eurozone. Germany knows it..the rest of Europe knows it..and the US knows that if Europe goes bust, the US will go bust. Trust me, these ass clowns do not want to be at the helm when fiat collapses and they will keep the game going as long as possible and by doing so will make the consequences of the inevitable collapse magnitudes worse. Help yourselves because the state isn't helping anyone out of this one.