Last week (see Ireland Bailout Fails to Calm Markets), we showed you graphs of bond yields (interest rates) for four of the PIIGS countries — Portugal, Ireland, Greece and Spain.
Now, here are the graphs for Italy and Belgium:
10-year bond yields for Italy and Belgium as of November 30, 2010 (Bloomberg)
These interest rates are still around only 4-5%, not the 9-12% rates we were talking about for the other countries. But you can see from the graphs that they’re rising parabolically, and that’s causing EU officials to become nervous and panicky. The financial crisis is spreading.
It’s not just countries that are affected. European corporations that wish to borrow money by issuing bonds are even worse off, according to the Financial Times (Access).
“Borrowing costs for most companies and banks in Europe have jumped but issuers from countries on the eurozone’s periphery have suffered most,” according to the article. “Analysts and bankers said that, in effect, bond markets had mostly shut for these issuers.”
Bond yields improved slightly on Wednesday on the rumor that the European Central Bank (ECB) was going to propose a massive new bailout program on Thursday, on the order of 1-2 trillion euros. Under the proposal, the ECB would purchase the country bonds and possibly also the corporate bonds at lower-than-market interest rates, effectively transferring the debt risk from the individual countries and corporations to the European Union itself.
It’s not at all certain that the proposal will be accepted. Similar programs by the American Federal Reserve central bank could be enacted with much less difficulty because of the highly centralized American government. But the European Union is still a loosely confederated group of countries.
“The knives are out,” says a Euro Intelligence analysis, which says that Spain is accusing Germany and France for destabilizing the euro, and Ireland is blaming the ECB for pushing Ireland into an unnecessarily unfavorable bailout situation. As for the rumored ECB bond purchase program,
“Germany would go ballistic. Considering Axel Weber’s publically announced opposition to the puny bond purchase programme, which so far added up to a mere €60bn, it is hard to predict how Germany would react to a breach of European law, not to speak of German constitutional law. The loss of confidence in the euro and its institutions would be complete. This is another of those brilliant ‘solutions’ that backfire within a short time after their announcements.”
(Update: After this story was written, the ECB announced that it would not pursue the bond purchase program, although existing more modest liquidity programs will continue, according to the NY Times. In other news, it’s been revealed that the Fed has provided $3.3 trillion in loans to foreign, according to Blooomberg.)
However, Europe is running out of time, according to a Reuters analysis. According to one analyst, “The politicians in Europe as a group, and perhaps an orchestrated group, keep putting out the message that everything is fine when it is obviously not. There reaches a point, which arrived [on Tuesday] in my opinion, when the investment community’s faith was breached one too many times and now people are fleeing the scene.”
An analysis in Spiegel examines what will happen if the euro currency collapses. There are two scenarios considered. In one scenario, the euro is eliminated, and each country returns to the national currency it used in the 1990s. The article points out that some 50% of Germans would like to see the deutsche mark currency reinstated, and that an estimated 13 billion deutsche marks are still stashed away in people’s mattresses and other hiding places.
In the second scenario, the euro would split into two currencies. The more stable euroland countries, including Germany, Austria and the Netherlands, would jointly introduce a “northern euro” or “hard-currency euro,” based on budget discipline. The PIIGS countries would join a southern or “Club Med” euro that could be devalued at any time.
The article points out that either of these scenarios would be disastrous for Germany. The costs to implement the new currency would be “staggering.” But more important, the strong northern euro would make German exports so expensive that German exports would tank, and unemployment would skyrocket.
This last point is particularly ironic. Readers may recall that back in the days of the bitter discussions of the bailout of Greece, Germany was accused of being responsible for Greece’s troubles, by having lent money to Greece so that Greece could purchase German exports. That trick would no longer be possible if a southern euro were devalued.
Ambrose Evans-Pritchard, writing in the Telegraph, compares the situation to World War II, and says that only one solution remains: Create a “total fiscal union to all members of the eurozone before everything falls apart, and to be enshrined in EU treaty law forever.”
Under this proposal, “All debts of Greece, Cyprus, Italy, Spain, Portugal, and Ireland will be fused immediately with German debt; a single treasury will control spending, and issue euro-bonds for all Euroland.”
Ever since the credit crunch begain in August, 2007, central bankers and fiscal authorities around the world have used one monetary easing trick after another to head off panic. In 2007, it was only necessary for the Fed to lower the Fed funds interest rate by 1/2%. Each crisis since then has been bigger than the previous one, and each monetary easing trick has had to be bigger than the previous one. Now, we may be talking about a 1-2 trillion euro bailout.
In a column entitled, “The Euro has no Clothes,” appearing in the NY Times, Roger Cohen made a rather astute comparison between the euro currency and the League of Nations.
“Is the euro to the early 21st century what the League of Nations was to the early 20th: a fine idea that became a political orphan and was condemned to unravel?As Ireland follows Greece in the great bailout domino game, and Portugal and Spain loom, the euro can no longer take its survival for granted just because its collapse would be unthinkable.
Both the League of Nations and the euro were conceived for worlds that vanished. The League emerged in 1919 from the ashes of World War I with the aim of preventing another war. But its idealism was an early victim of Hitler’s violent nationalism. Changed forces in Europe could not be checked by its covenant.
Jacques Delors’s “Report on Economic and Monetary Union,” laying out the path to a single euro currency, was presented in early 1989 just as all changed utterly.
Within months, the Berlin Wall fell, Germany was reunited, the Soviet empire imploded and Yalta’s imprisoned European nations were freed. …
Yes, the League of Nations collapsed, but it did lead to the United Nations. The euro may also unravel but the idea is too good not to return in force. Between the League and the U.N. lay catastrophe. From here to euro 2.0 is not going to be pretty.”
From the point of view of Generational Dynamics, the League of Nations and the euro currency were both created at roughly the same time in the generational cycle: during an Unraveling era just preceding a crisis era and a crisis world war.
The survivors of World War II created the United Nations, the World Health Organization, the International Monetary Fund, the World Bank, the Rockefeller Foundation (Green Revolution), and other international organizations not only to prevent a new world war, but also to end poverty and starvation and to improve health. This happened as World War II ended, and could not have happened at any other time. That’s the way the world works.
There are many big projects floating around these days — the European Union, the euro currency, universal health care are examples. All of these projects are doomed to failure, like the League of Nations, and will be destroyed by the approaching world war. But once the war ends, all of them will be resurrected and implemented by the survivors.
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