Deutsche Bank’s fixed income research team don’t see any need to beat around the bush.
We’re in the early stages of the Global Sovereign Crisis. End of.
A theme they’ve been pushing for some time now.
From their research note on Friday (our emphasis):
It’s perhaps worth recapping why in our start of the year doc ‘Think the Unthinkable’ we thought there was a still a risk that there is very little anyone can actually do outside of extreme money printing to solve this ongoing financial/sovereign crisis. Printing money might end up being the only option as the debt levels are just too large across the Western World. Our argument was that never before in observable economic history have so many countries had so much combined Government and Financial (G+F) Debt. Many, many countries have defaulted through history with much lower debt.
We’ve no idea if our arguments are correct but what we want to show is that this situation is so unique that to simply say that Italy, Spain and even other seemingly ‘safer’ countries will avoid the Sovereign crisis might just be hopeful given we’ve never been here before. No-one has a template for such an environment but we do know that severe problems have occurred at lower debt levels through history.
And they conclude:
In these unique times where the free market has largely ceased to exist, it is dangerous to have strong short-term views. However the medium to long-term view remains that we are in the early stages of the global sovereign crisis. This sovereign crisis has yet to navigate its way through a recession yet and at that point it will likely engulf a wider range of entities. Given our view of shorter business cycles in the post crisis world this may occur sooner rather than later. Until then it’s all about the authorities. If the recent sell-off in Italy is due to the market worried about contagion and not solvency or sustainability, then the EU can probably give itself more time by finally resolving the Greek situation and possibly by extra initiatives such as allowing the EFSF to be given the freedom to buy Government bonds in the secondary market.
Even if the EFSF is given such freedom then there may be a few weeks of delicate political negotiations as the policy would need unanimous parliamentary approval across Europe. To cover this void the ECB may need to recommence their bond buying program that they ceased 4 months ago. Longer-term this may need to be a permanent feature in order to prevent the Euro unravelling. These truly are unique and dangerous times.
To describe that as sobering is probably understating it.