Tuesday, May 8, 2012

Next Stop -- Bond Auctions

Now that it is clear that political support for the Merkel-Sarcozy plan has disintegrated, the next step will be escalating bond yields across Europe.  For a while, Germany will be spared rising yields, but, in time, they will join their European neighbors.

Essentially, the political upheaval in France and Greece and earlier in Spain and Italy means there is no possibility of budget cuts and economic reform in these countries.  Their political leadership intends to sell the same discredited bill of goods to their fellow countryman that they have been selling them for decades.  You can have it all.  Essentially, the Obama plan.  Everyone can have everything and no one need put aside any funds to get it. 

But, the one group that isn't buying it anymore are bond buyers.  They will be departing in droves, which means declining bond prices and spiking bond yields across the Eurozone.  The one day reaction on Monday was the opposite -- bond yields actually dipped in Europe once the election outcomes in France and Greece seeped into the markets.  But that is a head fake.  The future is for dramatically higher bond yields, effectively eliminating any prospect of avoiding default.

This could have been limited to Greece had Greece been permitted two years ago to go down the structured bankruptcy route.  Since that time, Greece has received a massive amount of new funding from other countries in the Eurozone.  Now, 75 percent of the 270 billion euro Greek outstanding sovereign debt is owned by governments and banks in the rest of the Eurozone.  Now, the Greek disaster spreads automatically to the rest of the Eurozone, no matter what happens in Greece.

As debt yields rise in Spain and Italy, they too will join Greece in the disaster zone.  There now is no policy solution available.  It is too late.

So, it may no longer matter much for the economic future who wins what election.  The outcome of economic chaos is on the way regardless.

You reach a point where foolish policies can no longer be corrected and countries will descend into chaos and political radicalism.  We are at that point in Europe. 

Watch the rising bond yields across the European plain.  They are the smoke signals that will signal the end of a united Europe and the beginning of a new era of political and economic chaos.  This is the ultimate and predictable outcome of the entitlement state.  No country or collection of countries that make unlimited and unaffordable promises can escape this fate.  We are witnessing the breakup of modern civil society in Europe.

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