Posts Tagged ‘Germany’

Germany vs. France Not Just Being Played on the Pitch

June 17th, 2010 Michael McDonough Comments off

The spread between France’s and Germany’s 10y Government bonds remain near levels not seen since the collapse of Lehman as France takes on tough fiscal tightening.  Since the onset of the European debt crisis France and German yields have benefitted from worried investors moving funds away from economically weak Eurozone peripheries to the regions ’stable’ AAA rated credits.  However, after being blindsided by Europe’s debt crisis investors are developing a new sense of risk, which doesn’t bode well for France’s lackluster history of correcting past deficits, especially while its current budget deficit approaching 8% of GDP.    This has given Germany an edge in investors’ flight to quality. France has already undertaken remedial measures to rein in the deficit, including raising the retirement age to 62 from 60, prompting  protests from the country’s socialist party and labor unions.  France will likely struggle with its ability to rapidly implement the necessary austerity policies, with any significant slippage, or success, revealing itself in the country’s spread to equivalent German government bonds.

Source: Bloomberg

Categories: Europe Tags: , , , ,

France Shows Signs of Weakness…

June 9th, 2010 Michael McDonough Comments off

France is no European angel in terms of its fundamental, yet like Germany the credit has received  ’safe-haven’ status from investors; that is until recently.  French 10Y government bonds have traded mostly lockstep with equivalent German debt since the onset of the European debt crisis, but since the beginning of June the spread between the two have begun to widen.  Historically, France and Germany have had easy access to global financial markets, allowing them to readily issue large sums of Euro denominated bonds, separating the pair from smaller Eurozone peripheries including Greece.  However, investors are growing increasingly concerned over France’ ability to to rein in spending and control a surging deficit.

One of the best quotes I have seen on the topic comes from Nicolas Lenoir, chief market strategist at ICAP Futures LLC, who says, “Being French I can promise you first hand that if there is any form of austerity required as part of the $1 trillion package it will not fly one bit,” Lenoir said in a recent correspondence “We had riots with a daily car-burn rate above 1,200 for over a week because a teenager electrocuted himself trying to escape from the cops, so just try and imagine if railway workers can no longer retire at 50 or 55 after being driven to exhaustion watching a computer do their job 35 hours a week.”  In short, investors’ recent concerns–demonstrated by rising spreads to Germany–are likely not unfounded given France’s past on implementing such measures.  Looking ahead, France will likely continue to come under the microscope of investors, and without clear continued indications the country is headed in the right direction what historically has been easy access to foreign money may feel a bit more painful.

Source: Bloomberg


This Week’s Critical Government Bond Auctions, & Worries for Spain

June 8th, 2010 Michael McDonough Comments off

Keep an eye on these government bond auctions, especially for Spain and Portugal, as a bad auction can provide the catalyst for further risk aversion:

June 9th:
09:00 GMT Germany: 2y Schatz Auction €6bn
09:30 GMT Portugal: 3y and 10y auctions €1.5bn
09:30 GMT UK: New 2020 Gilt £3.75bn
17:00 GMT US: 10y Note Auction $21bn

June 10th:
02:00 GMT Japan: 5y JGB Auction ¥2400bn
08:30 GMT Spain: New 3y SPGB Auction €4.5bn
17:00 GMT US: 30y Bond Auction $13bn

June 11th:
09:00 GMT Italy: 5y and long end BTP Auctions €7bn

*Data compiled by Barclays

Spain has a signiifcant amount of debt coming due in July, which won’t go unnoticed by investors, especially if their upcoming auctions fair worse than expected:

Source: Bloomberg


Spreads in Europe on Track to Test Pre-Bailout Levels

June 7th, 2010 Michael McDonough Comments off

The aggregated spreads of Europe’s weakest peripheries plus Belgium are on track to test their pre-bailout levels, as investors question whether or not a default will become necessary and what contagion effects it might have.  The biggest concern is that a default could lead to a Lehman like effect halting liquidity as banks and investors question each other’s exposure to the defaulted debt potentially leading to a significant funding issue for seemingly non-effected nations.  On this note, the German backed-bailout was not just a rescue of its profligate neighbors, but also its domestic banks, which are said to have significant exposure to the bonds in question.  In any case, trader sentiment toward the Euro is likely to remain weak as spreads drift higher for economically weak nations as the fine balance between effective fiscal austerity and growth is hopefully discovered. 

 Aggregate 10Y Government Bond Spreads Over Germany:

Source: Bloomberg

As an aside, over the past week Belgium yields have experienced the largest increment of the 20 European nations I track, which should continue to be monitored.  Belgium has one of the largest debt to GDP ratios in the region, a relatively weak fiscal deficit, and regional and political strife.  As the situation in Europe deteriorates, investors will likely continue focusing on Belgium, a trend that can already be seen through the past week’s spike in yields.  Prior to now investors had given the credit a pass partially due to a history of positive primary surpluses and its historical precedent of reining in wavering finances.  Belgium’s debt to GDP ratio is expected to climb to over 100% of GDP by the end of this year.  

Categories: Europe Tags: , , , ,

Risk Aversion the New Norm

May 21st, 2010 Michael McDonough Comments off

Global markets may be converging on a new ‘volatile’ norm as investors revalue risk, as governments begin the painful process of deleveraging to more sustainable debt levels.  Thus far fears of sovereign defaults have remained contained to the usual suspects—fundamentally weak nations—leading investors to flock to the safe-havens of the U.S., Japan, and Germany.  Risk aversion has pushed 10Y German Bund yields down to a multi-decade low of 2.632%; while 10Y U.S. Treasuries are yielding 3.113% from nearly 4% in April.  Yet, safe-haven debt levels are in most cases worse than their weak counterparts, especially in the case of Japan, meaning deleveraging is a unilateral prescription.  I won’t beat a dead horse on who could be the next Greece, but I do want to emphasize that deleveraging is a painful process, which can adversely impact growth.  Eventually, in the U.S. tough austerity measures coupled with substantial tax increments will be necessary, transforming the fuel of the nascent economic recovery, fiscal stimulus, into fiscal drag.  Japan’s likely the most at risk of the safe-havens with a vast amount of its debt financed domestically, by what is now a shrinking and ageing population; meaning external financing will ultimately be necessary.  This could cause investors to reassess Japan’s stability.  The good news is while tough measures in the US are necessary— creating significant economic headwinds— it should allow the nation to avoid the fate of Greece.  Meanwhile, I recommend monitoring investor sentiment toward Japan as the canary in the coal mine for the U.S.

Categories: Asia/China, Europe, US Tags: , , ,

Market News International: Internal Report Says Germany’s Govt Cannot Help Greece

February 10th, 2010 Michael McDonough Comments off

FRANKFURT (MNI) – Germany’s government is not allowed to help Greece, as such aid would violate European Union law, German business daily Handelsblatt reported Wednesday, citing an internal report from the German parliament.

The legal report also rules out any form of financing of the Greek budget through the ECB or national central banks.

“Moreover, member states may not guarantee the debts of another member state,” the report argued.

Handelsblatt noted that the report was commissioned by the free-market oriented Free Democratic Party, which governs in a coalition with the Christian Democratic Union and its Bavarian sister party the Christian Social Union.