Next Eurozone debt victim?
Research for Online Investors

by John Dalt

11/30/10

The Ireland rescue is now in the drawer, waiting on the government to approve measures to implement it.  European markets were down this morning…why?  You can paint an old house and put up new wallpaper, but it is still an old house.  Interest rates on bonds from Portugal, Spain, Italy, Belgium and France have begun to rise.  Even Germany’s Bund saw a spike.

Collateralized Debt Obligations (CDO) on Spain, Portugal and Italian debt jumped to record highs this morning. CDOs represent the cost to insure the debt against default.  The Euro fell to two month lows against the Japanese Yen.

What happens when the rescuers run out of money?  According to a Reuter’s survey of 55 fund management companies, investors have cut back their ownership of eurozone bonds this month.  In many cases, they chose to buy equities rather than bonds from other countries.

Rick Meckler of LibertyView Capital Management said, “The crisis of confidence in Europe can’t be resolved quickly.  No single event can put things back in order.”  Willem Buiter, Citibank’s Chief Economist called the eurozone credit crisis an “opening act” while predicting credit concerns could soon extend to Japan and the United States.  He wrote, “There is no such thing as a safe sovereign (debt).”

We have often written about the difficulty Spain presents to the eurozone.  Spain’s economy represents 11.8% of total eurozone GDP.  What about Italy or France?  Italy is the eurozone’s third largest economy with 17% of the eurozone’s GDP.  France is 21.3% of the total economic output of the countries that use the Euro as currency.

Germany has the largest economy in the eurozone, and represents 26.9% of total GDP.  As the ‘bond vigilantes’ climb the ladder to take down countries, the stakes grow larger and remedies more difficult.  Italy has been called “too big to bail.”

Slovakia is one of the eurozone’s smallest economies, and is experiencing 3% GDP growth as Germany is their largest trading partner.  Slovakia’s deficit is 8.2% of GDP, more than twice the target rate of 3% set for eurozone countries.  The rot is everywhere.

This morning the Case/Shiller home price index showed a decrease in housing prices.  The market expected a small increase.  The Chicago Purchasing Managers Index showed a stronger manufacturing base than anticipated.  Consumer confidence was up more than expected this morning.  We suspect this reflects a happy shopping weekend!

One of our daughters bought an IPad on Saturday.  The last one available at Best Buy.  It is quite a device, it is no wonder Apple is selling them like hotcakes.  She told me, “Dad, I don’t need a computer now.”  We shall see.

The market is trying to regain momentum after being off sharply this morning on concerns over Europe. China is reported to be on the verge of raising interest rates. It seems we are in a bad news cycle. Even the rumor of adverse news is enough to make the market nervous.

The mailbag:
I don't understand how all these European countries keep getting hammered but the U.S. seems to remain in the clear with everything being fine and dandy?---paid up subscriber T.M.

John’s reply:  Our time will come.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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