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Just a few weeks ago I wrote how the lack of true sovereignty in Europe meant that none of the currency users were “risk free” bond issuers.  That is, there’s a very real default risk for all of these nations.  They can all “run out” of Euro.  I wrote:

“So, not to belabor the point, but I feel that 10 year German Bunds are an absolutely atrocious deal at 1.78%.   This doesn’t mean the risk of default is on the table, but the simple fact that default is a risk at all makes these bonds infinitely more risky than, for instance, a US 10 year note at 2.05%.   In sum, the term “safe haven” in Europe appears to be a bit of a misnomer in my opinion.  Nothing is safe as long as this wretched monetary system continues to exist in its current format.”

Since then, the 10 year Bund has jumped to 2.14%.  We appear to be seeing the answer unfurled before our very eyes.  The yields in the north are slowly inching higher.   And this morning’s German Bund auction (which was a failure by any metric – I highly recommend reading Izabella’s Kaminska’s piece on it here) shows that none of these nations are actually safe.   And Germany is not only steering the ship, but by far the safest economy in Europe.

Unfortunately, Angela Merkel continues to kick the can with the same staunch refusal to admit that Germany has a duty to help fix the problems in Europe.  This morning, she was out again reiterating her position against Euro Bonds.  This is increasingly frightening commentary.  It’s eerily reminiscent of Ben Bernanke saying the credit crisis was contained in 2008.  I don’t think she has any idea the size of the fire she’s playing with here.  We could quite literally see the banking system in Europe freeze up within weeks with the way the bond markets and interbank markets are beginning to seize up.  The lack of proactive policy in Europe is beyond staggering.  There’s now a near consensus that Euro bonds are needed and yet the Germans just refuse to move an inch.

The key takeaway – you should own NOTHING European.  Not equities, not bonds, nothing.  The risks here are extraordinary.  The market risk due to political ignorance is like nothing I have ever seen.  Sadly, the politicians won’t recognize the depth of the issues until it is smacking them in the face.   Let’s hope that doesn’t involve Lehman Bros redux…..


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