By John Galt
November 30, 2011 – 12:50 ET
If I were to offer an unbiased opinion, I would say that it is too early to tell. However, the lack of a vociferous and solid course of action for the EFSF to bail out anything beyond what has been established for the nations of Portugal,Ireland, and Greece versus the abject panic in Berlin and Paris about the collapse of Italy and Spain tells this blogger that indeed, a decision may have been made to limit exposure to the PIG nations and allow them to fail and focus all efforts on Italy and Spain. The collapse of those Latin nations would have market a complete dissolution of the European Union whereas a “temporary” ejection of those weak sisters would buy time for the entire European system to be restructured.
To illustrate the reaction of the sovereign bond complex of the PIIGS and their yields today from the actions announced at 8 a.m. this morning, here is a brief overview of their yields after the action. Please note some of the drastic intraday moves and how Greece only temporarily saw its 1 year yield drop below 300% after the announcement:
(click to enlarge/reduce charts)
Portugal 2 & 10 Year Yields
Both yields are totally unsustainable for the nation to survive as a member of the European Union or at a minimum, the EMU.
Irish 2 & 10 year yields:
Again, if the ECB and other central banks decide to save Italy and Spain, Ireland appears to be the weak sister and the idea of a liquidity famine setting in seems valid.
Greek 1, 2, and 10 year yields:
All of those yields indicate a total and complete collapse of the sovereign bond funding mechanism for the nation of Greece despite all of the “bailouts” enacted thus far.
Now for Italy and Spain. First Italian 2 and 10 year yields:
Of course with the ECB and EFSF buying those bonds, yields had best drop below 7% on a regular basis or Italy is toast. With the 10 year far north of 7% yields almost daily and the swings of +/- 50 to 100 pips daily, there is no way that these issues (BTPs) can even be discussed as ration investments for normal investors.
Spain is not much different other than the election promises to cause more drastic action to slow the economy further:
Needless to say, without the ECB these suckers would move like Greece. Thus the question I asked in the title:
Did the major central banksters appear to abandon the weak sisters in the PIIGS roast to just roast the PIG nations and allow the largest economies to survive?
I lean towards the answer of “yes” and these nations will spin off from the Eurozone in January or February of 2012 with massive promises of “support” from the IMF to guarantee a soft-landing scenario. Unfortunately those pesky derivatives are still hanging out there so whatever you watch, hear, or decide in the next 30 days should be viewed with great skepticism as these nations pay lip service to the world to promise reforms and other insanity as they have since 2009.
The one thing to watch, without a doubt is where money is flowing. And I can promise you that it is not into financial instruments that show any hint of being illiquid. More on that in a posting later on this afternoon.
All charts used above are from www.bloomberg.com