By: Christopher Lewis
In just a few short days, the markets have pulled back from the euphoria caused by the EU’s bailout plans. This is becoming a bit of a merry-go-round as the Europeans continue to come together with patchwork plans to stem the tide of financial destruction in sovereign debt markets.
The biggest issue is that the plans simply aren’t enough. Many of the ideas are showing the unwillingness of European lawmakers to do what is needed – cut spending in a massive way. Europe offers some of the most generous benefits in the world to its people, and while this may be a good thing in principle, they forgot to actually pay for it. The continued borrowing of money in order to keep the status quo has finally come to a head as the Greeks have flat out lied about their financial situation in the first place. This has caused massive worries in the markets, and there are no real signs of this changing anytime soon.
At the time of this writing, Italian 10 year bonds are yielding over 6%, and this is quite a worrying development as the debt issues in Italy are far more extensive than anything the Greeks might owe. With this in mind, the French banks have all lost 10 – 15% in trading on Tuesday. Further adding to the confusion and drama: The Greeks are going to have a referendum on the EU package, allowing the population to vote “for” or “against” the implementation of it. It is hard to think that this will pass, and anyone who has seen the rioting and protestors on the television reports will certainly be aware of the fact that this could be the beginning of the end game for the Greeks in the EU. Default is all but assured at this point, as the populace is getting tired with the austerity that has been forced upon them.
Where the Euro is Headed
The sell off has been brutal for the past couple of days, but let’s be honest here: The pop that the announcement of the EFSF got was well overdone. Now we see that the details are being picked through, and low and behold – the Europeans have kicked the can down the road again, and even made the mistake of thinking the Chinese and Japanese were going to come to their rescue in purchasing these special bonds that the EFSF offer. One big problem: They will take away from the demand of the French bonds, German bonds, and other EU countries.
Looking at this, it is hard to think why anyone would want to own the Euro. A case can be made that one doesn’t want to short the EUR/USD as the Americans have issues of their own, but the issues in Europe are far overreaching any others in the world right now. It seems that every time the EU comes up with a “solution”, it simply produces a rally from which to sell for a while. Sooner or later, the bottom is going to fall out as we are seeing more and more vicious selloffs in the Euro. Because of this, buying the Euro is going to be difficult for the foreseeable future as sudden headlines can wipe out gains in a blink of an eye.