The bond markets rule the world

If one believes European top politicians, then an economic end of the world was avoided by them, the risk indicators of the financial markets, on the other hand, expose the crisis as a rather minor event

No sooner had the financial markets got over the initial shock than the stock markets and, above all, the euro continued their downward slide. Not least Deutsche Bank boss Ackermann was held responsible for this, who in the ZDF talk show "Maybrit Illner" dared to doubt that "Greece really does have this power over time, its approximately 300 billion euros. Euro debt to be really repaid".

Ackermann’s doubts are justified, and not only in the case of Greece, since there is hardly a country that has ever repaid its debts on a sustained basis. In the end, it was the highest of feelings when a country was able to keep the ratio of gross national product to debt constant, i.e. when the economy grew faster than the debt. But this is far from being the end of the story. In fact, Germany, like almost all other OECD countries, was mostly forced to pay the interest on old debt with new debt at the peak of the economic cycle.

And given the demographics of Western industrialized countries and the likely costs of climate change, it is impossible to see how even a single country that does not have high oil exports can sustainably reduce its debt over the next economic cycle. The planned austerity programs will not change this situation, as they will probably only lead to even more drastic declines in tax revenues and even higher deficits and national debts throughout Europe.

In this respect, the bond markets’ skepticism about profligate governments is well-founded, but whether this means that the markets should be allowed to rule the world remains an open question. Thus, the outgoing chairman of the Left Party, Oskar Lafontaine, could certainly be agreed with, according to which governments can only "puppets", that the financial markets have been "puppets of the financial markets".

The dominance of private lenders over political leaders is not a new development, however. In the early 1999s, the campaign manager of former U.S. President Bill Clinton, James Carville, became known around the world for his conviction that, if there were a reincarnation, he would no longer want to return as U.S. president, pope or baseball star, but rather as a bond market leader. Because then he could intimidate everyone – and how right he was has just been impressively confirmed.

I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.

James Carville, Clinton Advisor

Flight of international capital from risk

But what had actually happened on the financial markets?? In fact, after a year of quite euphoric gains across markets, the financial markets deteriorated a bit in April and then came to a head in early May. Thus, the most respected pacemaker for the general decline of the financial markets, the US leading index SP 500, very weak in the first week of May, losing almost 10 percent, but had previously gained a good 20 percent since February.

Now that on Thursday, May 7. May, ECB chief Jean-Claut Trichet had claimed at the press conference after the ECB Governing Council meeting that the Council had not even discussed buying eurozone government bonds directly in the future, the crash on the stock markets had intensified and culminated a little later in a 20-minute slump on Wall Street of a further ten percent, which was, however, largely made up by the close of trading and was said to be "technical" is said to have been caused by.

However, the slump continued unabated on Friday and at the same time the prices of Greek government bonds had also been pounded into the ground. While the securities of the strong Euroland countries were able to make significant gains at the same time, the bonds of Portugal, Ireland, Spain and Italy also fell sharply.

In line with this globally visible trend towards risk avoidance, the iing activity of companies and especially banks has largely come to a standstill, while the price of default insurance on their debts has risen. For example, the price of default insurance on the debt of the Spanish major bank Santander (the "5yr CDS") on Friday by 80 payers to 254 basis points (100 BP. = 1 percentage point – d.h. it costs 245,000 euros to insure 10 million euros of Santander debt for one year) shot up and had only been reduced to around 160 bp with the rescue package. At the same time, the euro had also plummeted massively and was trading as low as last seen after the Lehman bankruptcy.

In a nutshell, capital markets had generally reduced their risk appetite from mid-April onwards on the back of weak European government bonds, selling equities and poorly rated bonds, and "safe haven" as top-rated government bonds or gold were bought. This flight of international capital from risk also led to a high demand for dollars, so that there has been talk of a dollar shortage on the markets for four weeks now, which has caused the euro to fall unchecked from a level of around USD 1.35 to below USD 1.25 to date.

The saviors of Europe

While the media were now recalling the Lehman bankruptcy and individual traders were talking of a "deja vu" the resulting political scaremongering was enormous. While German government politicians, in view of their less than glorious role in this affair, gave way to the opposition in terms of pessimism, Austria’s Interior Minister Maria Fekter loved to let it leak out that, before Sunday’s crisis summit, she had just about completed the deployment plans "to protect infrastructure and deal with angry crowds" for the case brought out of the drawer that "bank branches remain closed or cash dispensing at ATMs is stopped because of the economic crisis".

The rescue package was "just yet" The bailout package had been put in place in good time, said Austria’s Finance Minister Josef Proll, who not only presented himself as Europe’s savior on ORF and German TV, but also talked bluntly about the fact that without the bailout package, people’s savings books could have become worthless and monetary transactions could have collapsed. This could not have remained unnoticed in Austria. As a result, the author of these lines received inquiries from concerned savers asking whether it was not time to empty their savings accounts and store their cash under the mattress or invest in gold. invest in gold.

According to the most widely followed crisis indicators, the current crisis is miles away from serious consequences

The VIX index, which reflects the volatility on the U.S. stock market, still looks halfway threatening and had doubled to over 40 at the end of last week. However, this was probably mainly caused by the rash price collapse on Thursday, when the US stock indices were down almost ten percent for 20 minutes, although this panic index had amounted to more than 70 figures in 2008.

The TED spread, on the other hand, which indicates the difference between the reference interest rate in interbank transactions (three-month Libor) and the current yield on U.S. three-month Treasury bills, proved to be absolutely harmless. This crisis indicator is regarded as a crucial measure of banks’ confidence in each other, and last week it had just risen from just under twenty to 32 payers – a level, incidentally, that was never fallen short of in the boom year of 2005, while the TED spread had even shot up to over 450 payers at the height of the subprime crisis in October 2008.

Remain the "Souvereign Spreads", risk premiums, which for Greek bonds had risen toward ten percent at the beginning of May and had also risen sharply for other problem countries. However, even at the height of the panic, these spreads over Germany were less than two percentage points for Italy and Spain, and remained below four percentage points for Ireland and Portugal – despite the fact that interest rates on the "safe haven" Germany, which also allowed the risk spreads to expand on the positive side.

Why the banks had to close their counters just because the market prices of Greek and other southern European government bonds collapsed, without a rescue package, is in any case not immediately obvious. After all, even before the weekend, Greece’s current financing needs were covered by EU pledges and a real bankruptcy was ruled out for the time being. Moreover, since the ECB was now prepared to accept Greek bonds regardless of any rating changes, banks could always submit these securities to the ECB at a discount of 95 out of 100, regardless of the respective market value, in order to obtain liquidity or to refinance the bonds.

Of course, the foreseeable panic on the stock markets could have led to all sorts of distortions on the financial markets and certainly had the usual ill effects. A genuine bank run of the small savers would have been however probably only on request by the policy. After all, ever since deposit insurance has existed, banking crises have been played out on the interbank market, and in the euro zone, interest rates for three-month money had risen from 0.58 percent to 0.63 percent at the most recent peak of the crisis.

If the prices of eurozone bonds had collapsed even more sharply, the banks would certainly have had to make some value adjustments in the next quarterly report (unless, as is customary in the U.S.A., the accounting rules had simply been changed), but they would not have been able to make a significant contribution to the strongly positive development of the eurozone "Carry", The interest yield from the price of short-term central bank money and the long-term coupon, however, had not changed in real terms. And whether an eventual stock market crash had sunk the banks is also doubtful, given the very low average equity exposure of most banks.

On the other hand, as far as the difficulties of companies to place their bonds are concerned, it should not be forgotten that the major companies had already been able to finance themselves on the bond market to a huge extent in the months before and had already covered their financial needs for years to come in some cases. The sharp reduction in iance activity, which had recently plummeted to barely a tenth in some market segments, could thus indicate not so much a refusal to finance by the markets as the fact that companies willing to ie preferred to wait for better conditions to come along.

Has the euro just been too hard?

After all, interest rates had been extremely low in a long-term comparison, and the markets, which had previously been quite euphoric, were perhaps in the process of returning to a more realistic risk assessment. Of course, this soon had to hit the USA and Great Britain, whose public finances are hardly much better than those of Greece. The only problem is that the bond markets are currently demanding lower interest rates than ever before.

If, on the other hand, a country like Italy suddenly finds itself unable to sell its bonds at the desired price, the government and central bank there presumably still have sufficient informal arguments and sufficiently strong banks to persuade them to take the ie temporarily on their own books and, if necessary, pass it on to the ECB until they find private buyers for it. The fact that the banks had stopped lending to each other without a rescue package – as they did after the Lehman bankruptcy – is something that even Ackermann does not seem to have feared.

What remains is the fear of a further collapse of the euro, which has not benefited from the bailouts anyway. In fact, the ECB’s relentless buying of government and corporate bonds directly in the market, like the Fed and the Bank of England, does not seem to have instilled much confidence in investors.

Moreover, the problems of Southern Europe were probably due to a too strong euro more than anything else. As the long-term chart DM/USD since 1971 shows, the hard D-mark, for example, was hardly higher against the dollar for a whole year than the euro is now after its collapse to around 1.25 dollars. According to the OECD, the "fair" Exchange rate for EUR/USD currently just below 1.20 EUR/USD according to purchasing power parity, while Nobel Prize-winning economist Robert Mundell has been preaching for years that the ECB absolutely must keep the euro rate below 1.30 in order to compete globally.

The politicians were probably overestimated, however, if the scaremongering was interpreted as an attempt to print the euro down to a competitive level. The question arises whether the opportunity was not simply taken to sell the European electorate massive future tax increases and at the same time further gifts to the banks as inevitable.

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