High tide, low tide

English version thanks to Marion Sarah Tuggey
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Spread. A term I had used until 2009 just to compare government bonds and corporate bonds. There were moments in which “excessive” spreads made us prefer corporate bonds, and others in which narrow spreads made us use government bonds.

In 2009 then, the markets started to distinguish between government bonds with increased accuracy. Virtuous and reliable countries had to be separated from the countries with an “easy” management of public accounts – after the multi-year “armistice” offered by the common currency, the events were developing into a renewed issuer-risk concern for the traders: the acronym PIIGS was born those days.

PIIGS were the countries that – for different reasons – had quite alarming deficit and/or debt levels. Notwithstanding the common reference to the ECB then, the markets started to consider them as less reliable, starting to evaluate the possibility of different realities into the common currency, such as solvable and insolvent countries.

A-class and B-class government bonds.

The trouble with these considerations on the markets is that if they are not stubbornly proved wrong, they feed themselves and prove they’re right “on their own”. The collateral damage is that the petals of the “to default or not to default” daisy are plucked off one by one, Greece, Ireland, Portugal…the daisy is losing its petals, and very early I’d say. In February 2010 the member states started to compete in issuing their bonds (“all’s fair in war”), in May 2010 the Greek situation became clearly an emergence and speculators were targeted (“hunt down the speculators”) but the traders started to operate on their investments (click on the pic to enlarge it):

10-year Italian (purple) and Spanish (orange) bond yields started their detachment from the group. Since then we’ve seen continual fraying (as with the March 2011 Portugese drift) and several temporary monetary interventions – simple cures for the symptoms, such as the sabotages which are offered nowadays: get the ECB a “bazooka”, let the EFSF or ESM buy government bonds, strengthen the powers of the BEI – that is, everything but changes to the political status quo – that is, everything but cure the disease. This hasn’t help Spain nor Italy to get back into the group. If anything, since the end of 211 it’s been clear that – in conjunction with the exhaustion of monetary weapons – even France (blue) is starting to detach (“the spread race”) from the “Core countries group”: UK (green), US (yellow) and Germany (grey).

A reduction of the cost of debt in order to control the damages of the situation is therefore becoming required.

For instance, Italy started to conceive yesterday a Fund composed of public properties, asset of listed companies, gold and money reserves, issuing AAA bonds and whose collection would help to re-buy government bonds with high interest rates.

A nice idea, to be used with the utmost self-restraint: if used at once to reduce the cost of debt, it will prove useful. And if it proves useful, politics will be tempted not to use but to abuse it – without changing anything of itself. Issuing counter guaranteed bonds from gold reserves and Enid, Engel and Mechanical shares is not the definite solution to excessive debt and hypertrophic nations.

Being aware is useful (also) in applying a due surveillance.

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About bimboalieno

Operatore finanziario professionale dal 1998; ha collaborato con diverse banche italiane ed estere. Si può scoprire dell'altro cliccando qui. Oggi é responsabile di un centro di Private Banking. Professional financial trader since 1998; he has worked with several Italian and foreign banks. You can learn more here. Bimboalieno is currently in charge of a Private Banking centre.