Not so tough now (EFSF edition)

Remember the hoopla about beefing up the EFSF? It’s not up to the task.

While professionals debated the merits of 1tn v. 2tn sensible folks – like my Mum – asked why jumbling up the exposures would make un-creditworthy deadbeats creditworthy?

Turns out – it won’t …

EFSF bonds are now ~300bps over Germany.  The market is looking through to the underlying credits.

That’s a problem, because if you start with a 2% yield for Germany, it makes it very hard to get yields sub-5% for those tapping the EFSF, and that increases the risk of unstable debt dynamics. You can see that with a 5% yield and a modest downgrade to growth and budget balance numbers, both Italy and Portugal become unstable.

A credit crunch led European recession is almost a certainty — it doesn’t matter who leads Italy or Greece. A mild European recession will threaten the stability of European debt dynamics and the only solution is going to be painful austerity (to re-establish credibility as a payer) or leaving the EUR, so that net exports can help the adjustment.

Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

please comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s