The big news is France. With sentiment worsening across Europe, France has lost its relative safe haven status ”“ credit default swap spreads on French government debt were up sharply today.
The trigger ”“ oddly enough ”“ was Hungary’s announcement that its budget is worse than expected (blaming the previous government; this is starting to become the European pattern) and in the current fragile environment discussed yesterday, this relatively small piece of news spooked investors. But these developments only reinforced a trend that was already in place.
It did not help that the Irish Minister of Finance announced Ireland has 74.2bn euros of guaranteed bank loans, bonds, and systemic support falling due between now and Oct 1. This is around 55% of GNP. It sounds like everyone backed by the Irish government had the “clever” idea to roll over their debts to just before the guarantees expire.
The big losers are Portugal-Ireland-Italy-Greece-and-Spain as always, but Belgium is now in the line of fire, and France is clearly under pressure. The spread between French and German credit default swaps (measuring the relative probability of default) is up ”“ yesterday this was 40 basis points, today it stands at 44 (up from just 5 basis points at the end of 2009; most of the increase is since mid-March, with a sharp acceleration recently). French bonds have become illiquid, with wide bid-ask spreads; not what is supposed to happen in a safe haven. This is going to make the French angry ”“ watch for more market slanders from top French politicians over the weekend; you know they would just love to ban trading in something.
Please do not shoot the messenger. This piece understates the gravity of the situation. One of my wife’s Hungarian cousins has worked in international corporate finance for decades. She says to watch out for InterKredit [bank] in Austria. Their exposure to Hungarian and Slovak real estate loans — many of dubious quality — exceeds the entire GDP of Austria.
I’ve commented earlier on ordinary Hungarians’ attempts to arbitrage very low Euro-denominated interest rates, and how it has collapsed. I speak pretty good Hungarian, but neither Eszti nor I can come up with a term for “jingle mail” in that language. The phenomenon is, however, wide and deep. A collapsing forint will only accelerate that trend.
Here is the point at which I must observe that Inter Kredit is the direct successor to Kredit Anstalt, the most important bank in all central Europe, whose collapse in May, 1931 was so devastating that (amongst other things) it forced Britain off the gold standard four months later.
If you’re inclined to trade such things in the market, check out ‘EUO’ a double-inverse ETF betting against the Euro.
Buy gold.