When debt contagion arrives…
Now it looks like no matter what Europeans are trying to do, and how many summits politicians rush to put together, things just keep getting worse.
If PIGS (Portugal, Italy, Greece and Spain) were to ‘fly ‘, and debt contagion were to spread, and Europe’s Lehman moment finally to arrive, you probably want to at least have a slightest hint of where the next domino is likely to fall. That’s the purpose of this short post.
The following four charts are from researchers at BIS, including my former Brandeis teacher Steve Cecchetti. I suggest that everybody take a minimum of five minutes going through these tables. For nerds like me, I stick them on the wall in my office.
All debt:
[singlepic id=17 w=240 h=180 float=]
Government debt:
[singlepic id=19 w=240 h=180 float=]
Household debt:
[singlepic id=20 w=240 h=180 float=]
Corporate debt:
[singlepic id=18 w=240 h=180 float=]
Why German bond yields are rising?
From WSJ, what it signals when the German bond yields are rising:
Yields on German 10-year government bonds have risen 0.25 percentage point in the past week to 2.15% even as the euro-zone crisis has deepened. Until now, whenever the crisis has intensified, German yields have fallen and the yield premium for southern European bonds has risen. This shift is a sign the end-game is approaching.
…
The difference is that buyers of U.S. and U.K. debt can be certain which country’s debt they are getting—and what currency it is denominated in. The euro-zone crisis is becoming binary. One possibility is greater integration, such as common bond issuance, which implies greater costs for Germany and fiscal dilution. The other is break-up, which implies costs for every country but which may favor short-dated German paper given the possibility of currency appreciation.