Courtesy of Daniel Sckolnik, ETF Periscope
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.” — Groucho Marx
The latest news out of the Eurozone is that a bailout of Spanish banks is due to occur shortly. No doubt Wall Street will celebrate at the thought that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) may all yet survive and the Eurozone shall remain intact.
The problem is that this particular bailout, like the ones that have preceded it, tends to address the problem of bank liquidity rather than the deeper issue of sovereign debt. The debt crisis requires a way for the Eurozone to share debt, such as the Eurobond concept. Without addressing that issue, the can will keep getting kicked down the street until it hits a cul-de-sac. That moment will come suddenly, and probably sooner than later.
This cycle of equity-buying euphoria will probably be as short lived as the one that followed the last round of announcements that Greece would receive further bailout funds from the European Union (EU) and the International Monetary Fund (IMF). The scorecard to watch closely is the yield of Spain’s 10-year bonds, which were hovering above the 6% mark as of last week. How far they dip in response to the current bailout won’t be the main thing to watch for, however. What to keep close tabs on is just how fast they ratchet back up.
There will be a certain tipping point where the risk simply won’t warrant a mere 6% yield. And, if and when it rises back to the 7% mark, there may not be enough bailout funds readily available to contain the next phase of what may be viewed as the latest contamination resulting from the threat of one or more of a PIIGS default. The question is how orderly that default unfolds.
What the Periscope Sees
In spite of the likely euphoria that hits the market in response to yet another Eurozone bailout, this one for Spain, there remain a number of issues that the bailout fails to address. The bottom line is that the debt crisis in Europe remains in place, and therefore subject to high levels of volatility. Coupled with the situations in Iran and Syria, investors should remain wary and maintain a posture of portfolio defense.
A broad…
