It could be just a matter of days to weeks before a new leg of the systemic crisis therefore hits markets. Expect Italy, then Belgium but also other EGB to widen sharply.
So says Harvinder Sian, the European rates strategist at RBS, who reckons the euro will soon have a near death experience that will final force policy-makers into action.
The reason is Thursday’s EU Summit.
While this might provide some relief for Greece, it will do nothing to help Spain and Italy, says Sian.
The EU Summit may provide some relief for Greece via lower loan costs, longer loans, and some debt relief via buy-backs. The problem is that this should have been done over a year ago and even if this policymaker strategy is mapped onto Ireland and Portugal, the damage has been done.
More importantly, policymakers remain well behind the curve, and are unlikely to do anything material to assist Spain & Italy. This is partly a function of the too big-to-bail theme but it is also Germany engineering their demise with insistence on PSI. Equally, the PSI can not be dropped given Merkel’s parliamentary arithmetic in passing EFSF reform. (The Bavarian CSU and liberal FDP for instance are likely to recoil on any shift away from PSI and/or upsizing of the EFSF beyond the planned €440 bn.)
Indeed they are as these flashes hitting the tape on Tuesday morning attest.
RTRS-EU FINANCIAL OFFICIALS ARE EXAMINING THREE BROAD OPTIONS TO SECURE PRIVATE SECTOR ROLE IN SECOND GREEK BAILOUT PACKAGE — POLICY OPTIONS PAPER
– FIRST OPTION WOULD INVOLVE GREEK DEBT BUYBACK AND CREDIT ENHANCEMENTS FOR PRIVATE SECTOR, BUT WOULD LIKELY CAUSE AT LEAST SELECTIVE DEFAULT
-SECOND OPTION IS BASED ON FRENCH PROPOSAL, WOULD OFFER NO CREDIT ENHANCEMENTS TO PRIVATE SECTOR, SEES NO DEBT BUYBACK
– THIRD OPTION WOULD INVOLVE A TAX ON THE FINANCIAL SECTOR, LOWER RATES AND LONGER MATURITIES ON GREEK EFSF LOANS, NO BUYBACK
Fiddling while Rome and Madrid burn.
Or more precisely while bond yields move higher.
Spain has entered the danger zone for yield levels. The chart below shows the yield moves in the constant maturity 10y paper for the GIIPS countries. These markets traded a range between 6 per cent and 7 per cent but ultimately this proved to be a pause before the move to higher yields then accelerated. There is no consistent yield trigger level inside this range but market talk of point-of-no-return around the 6 ½% is not without foundation either.
Given that Spain (and likely soon Italy) has entered this territory of yield levels we now believe that there is a growing risk that a large systemic risk event is plausible in the near term and if not then in a matter of weeks.
And that will bring us to the end game says Sian.
The conditions for a near death experience for the Euro are in place now, which in turn should finally galvanise a more serious policy reaction. In the interim, risk assets can be crushed.
In other words, things are going to get a lot worse before they get better.