Things are starting to get interesting in Europe. As we’ve been warning for weeks now (and equity investors have been ignoring) these problems are much bigger than many would like to admit. The break-up (or dramatic changes in its membership) of the Euro looks inevitable to me. Germany should bring back the Bundesbank and Greece should restore its ability to print its own currency. In other words, the Euro system should he unwound and each country should reinstall their own currencies. Of course, this would take years of careful planning and implementation, but I truly believe we are seeing the beginning of the end of the Euro currency. Just like gold, convertible currency systems always fail. This case is no different. Equity investors would be wise to take note. These problems could persist far longer than anyone believes.
Greece CDS now at all time wides. Last quote was over 800 bps.
Greek bonds yields are spiking into the stratosphere and near Emerging Market countries like Venezuela and Turkey as investors are concerned that Greece will need to restructure its debt.
According to Bloomberg data at 11:00am EST 2-Year Greek Bonds are now trading just shy of 15 percent, a huge jump of 190 basis points. The 5-Year yield is higher by 70 basis points to 11.45 percent while the 10-Year is just shy of double digits to 9.73 percent, an increase of 19 basis points.
Portugal debt from both the public and private sector when combined is greater than Greece and Italy at 236 percent of GDP according to a Bloomberg article. Portugal is feeling the heat as well this morning from the marketplace. 2-Year Portugal government bond yields are trading at 4.87 percent, an increase of 92 basis points while the 5-year is higher by 60 basis points to 5.34 percent. The 10-Year is at 5.57 percent, a move higher of 38 basis points.
Furthermore, S&P dropped Greece’s credit rating to junk late in the morning session. The credit rating agency cut its long and short term credit rating to below investment grade to BB+ and B, respectively. Earlier, S&P lowered Portugal’s long-term local and foreign currency ratings by two notches to A- from A+ with outlook negative, it said in a statement.
Other notable moves in Europe include Ireland where their 2-year yield is higher by 62 basis points to 3.60 percent and Spain where the comparable maturity is at 2.05 percent, a jump of 17 basis points. Italy who has a high debt burden has seen their yields jump by 24 basis points to 1.70 percent.
The Dollar Index is up by 0.41 to 81.621 as a safe haven while the Euro is down to 1.3268 from an intraday high of 1.3416. Equities across Europe are down as much 2 to 3 percent and even bigger in the peripheral countries.
U.S. Stocks are down and are finally catching on after days of rallying. Volatility is spiking up as well. The question is do we see a mild correction or a bigger leg down? Time will tell in the coming days.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.