Tag: sovereign debt crisis

  Europe is in trouble again.

Back in May the European Central Bank created a massive $1 Trillion bailout package for the countries on the fringe of Europe that were struggling with rising interest rates on their debts.

 Despite the enormous bailout package, interest rates for the PIIGS countries just hit new records today.

Irish and Portuguese government bonds fell, pushing the yields on 10-year securities to records versus benchmark German bunds, on concern European banks are vulnerable to losses on their holdings of so-called peripheral euro-region debt.

Spain’s debt isn’t doing much better.  

 This is particularly depressing for Ireland since it has already enacted the draconian austerity measures that the financial markets demanded. In fact, all of the European nations in question have implemented austerity measures, and yet the financial markets continue to punish them.

Ireland and Portugal are the big losers for today, but Greece is still leading the pack towards self-destruction.

 “Greece is insolvent,” Bosomworth, Munich-based head of portfolio management at Pimco, which oversees the world’s largest bond fund, said in a telephone interview today. “I see it as being quite a substantial risk that Greece eventually defaults or restructures.”

 One Trillion dollars in bailouts and we are back where we started four months ago. Why is that?

  The answer is surprisingly simple.

  When the stock market plunged 1,000 point in half of an hour on Thursday, the immediate rumors were of a “fat finger” trader who punched in $16 billion instead of $16 million. It’s a disturbing idea, that a single trader could cause such financial destruction, but its better than the alternative – that the stock market plunge happened while the markets were functioning the way they were supposed to.

 Since the original rumor, the facts have been revealed – there was no “fat finger”. The stock market crashed on Thursday because that is the way the system is set up to function. Thus was should expect this event to happen again in the not so distant future.

  The news started today with S&P downgrading Greek bonds to junk. It wasn’t just the sovereign debt that became junk, but also the debt of many of the major Greek banks as well.

  This dramatically increases the risk of default because junk rated bonds cannot be swapped for Euro-backed bonds, and this has markets very worried.

 Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, S&P said.