Spain vs. Germany 10-Year Bond Spread; Reflections on "Contagion" Theory

Here is an interesting chart and commentary courtesy of Steen Jakobsen, Chief Economist at Saxo Bank from Steen's Chronicle It's all Greek to me!

The back and forth of headline risks continues to drive this market between risk-on and risk-off to the huge frustration of investors as visibility seems to get worse and worse by the day.

There are still a number of event risks in the pipeline for the rest of June and into July, but the main point remains the same: We continue to only see political solutions based on buying time ("extend and pretend") and attempting to us liquidity to deal with a problem of solvency.

Spread between 10 year Government yield in Germany and Spain



click on chart for sharper image

I will once again reiterate that the main risk for Spain is not "contagion" from Greece but more the internal domestic issues coming to the fore: High unemployment, local states budget deficits rising and to some extent unaccounted for, the continued risk to bank stress test vis-à-vis housing markets and overall the funding issues for banks which are a Europe-wide issue.

Contagion or Just the Same Problem Elsewhere?

The spread is now down to 2.35 with the rally in European bonds in the wake of Greek bailout news, but nothing has changed in Spain, Portugal, Ireland, or Greece.

The contagion theory is that one country is sick and it spreads. However, Ireland, Portugal, Greece and Spain are already sick as a rabid dog. They cannot become infected, because they are already infected.

Furthermore, the IMF, ECB, EU medicine of throwing good money after bad is not the cure.

Ironically, France and even Germany are now at risk because of silly policies designed to prevent the unpreventable.

Plan to Spoon-Feed Greece to Death

The original Greek bailout was 110 billion Euros, now it takes another $85 billion (and counting). When the fire sale of Greek assets does not bring in enough money, the banks and IMF will place even harsher terms on Greece.

The revised plan is to spoon-feed payments to Greece in 12 billion-euro bites while demanding "progress". This will ensure Greece is sucked dry (at fire sale prices) of any government assets worth owning by the time the "bailout" is over.

See Plan to Spoon-Feed Greece to Death for a discussion.

Portugal, and Ireland should make note of the process. The same "bailout" plan will be used on them unless they tell the IMF and EU to go to hell.

Plan to Suck Greece Dry Will Backfire

The plan is to suck Greece dry, not to bailout Greece, but rather to bailout the banks that to lent Greece.

However, the plan will backfire. Greece will default anyway, and the ultimate cost will be higher to Greece and the banks that lent to Greece. European taxpayers will be asked to foot the bill.

Notice how silly this has gotten. Had Greece simply defaulted a year ago, the cost may have been haircuts of $50 billion or so. Now $282 billion (and counting) has been invested to "save Greece". Another $124 billion was approved today, details to be finalized later.

I ask again: Does Greece look or feel saved?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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