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Tuesday, July 24, 2012

Euro point

The Eurozone economies lurch from one crisis to another: burdened by deficits and debt to maintain their standard of living in the face of a recession the austerity measures focusing on paying and repaying banks to keep the system going is faultering. The reality of a 'two-speed' Europe with one set of EU countries fully integrated in the Eurozone and one set not has been replaced by the emergence of a two-tier system of basket-case peripheral, spending Southern economies and an inner core of saving Northern economies that threatens the stability of the Euro and has led to open talk of how to devise a break-up that would see the peripheral cases exiting the Euro and re-establishing their own national currencies (in the case of a sovereign default).
I have been a Euro optimist and continue to be so despite this long patch of very inclement weather. The underlying fundamentals of the currency union are still strong even without the sort of fiscal alignment (or economic subjugation) mooted by the Germans. The Euro is still far more stable in terms of exchange rate than the US will ever be.

So with the NZ dollar at record highs against the Euro (about 65c to the NZD when it was as low as 51c last year and has a long-term average about the 50c mark) and the availability of high yields in Italy (which as a pillar of the Eurozone I cannot imagine will either default or exit) it would probably be a good time for those big players with NZD to put their money into Italian bonds. This assumes there is less risk than the market is indicating right now.

Bernard Hickey: today:

The New Zealand dollar [...] even fell against the euro to 65.0 euro cents from as high as 65.9 euro cents late on Friday.

via Bloomberg:

Germany’s bonds outperformed their euro-area peers, with two- and five-year yields reaching record lows, as Der Spiegel magazine reported the International Monetary Fund will stop paying rescue funds to Greece, citing unidentified European Union officials. Italy’s 10-year yield climbed to a six-month high and Greek bonds tumbled.
Spain’s 10-year yield rose 23 basis points, or 0.23 percentage point, to 7.50 percent as of 5 p.m. in London after climbing to 7.565 percent, the highest since November 1996.
Spanish two-year yield climbed 77 basis points to 6.53 percent after surging as much as 99 basis points, the biggest intraday gain in the euro era.
“Spain would need a bailout if yields stay where they are for another couple of months,” Georg Grodzki, head of credit research at Legal & General Investment Management Ltd. in London, which manages $596 billion of assets, [...] Italy would then be “an open target for the next wave of attacks,” he said.
Germany’s 10-year yield fell as low as 1.127 percent, matching the June 1 record, before being little changed at 1.18 percent. The two-year yield was at minus 0.06 percent, below zero for a 12th straight day, after declining to a record minus 0.080 percent.
Yields less than zero mean investors who hold the debt to maturity will receive less than they paid to buy them.
Italy’s bonds slumped. The 10-year yield climbed 17 basis points to 6.34 percent after reaching 6.43 percent, the highest since Jan. 19.

The German yields are crazy low. Sub zero, like the Japanese in their deflationary period. With the risk premiums on Spanish and Italian debt so far from the German situation you know things in Europe are highly imbalanced, but this doesn't necessarily mean a system collapse or an Italian or Spanish default. So, if you're willing to sink a few billion into Italian bonds based on the hypothesis of someone who'll be lucky if they can scrounge enough change together for a pie for lunch - go for it.


Nek minnit

Italy's financial outlook darkened on Monday amid warnings that 10 cities are at risk of bankruptcy and schools may not be able to open in the autumn because of drastic spending cuts.
 Mr Monti hopes to reduce the country's €2 trillion (£1.6 trillion) national debt by dissolving 64 of Italy's 107 provinces, addressing long-standing concerns that they are an unnecessary and wasteful tier of government. The government plans to slash €500m from the provinces' budgets this year and a further €1bn in 2013.

The Monti government is pushing ahead with an ambitious spending review that envisages cuts to government services worth €26bn over the next three years.

Mr Monti reiterated that he will step down in Spring 2013, paving the way for elections.
Silvio Berlusconi has indicated that he will try to become prime minister for a fourth time, a declaration that has only increased market nervousness over Italy's economic future. 



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