If you look back at European 10 year bonds it goes a long way to highlight just how much trouble European states have got themselves in and just how quickly they have done so. Look at each of the countries that has been bailed out and the price of 10 year bonds over the last 18 months:
Bonds in Jan 2010: 2%
Bonds in Jul 2011: 14%
Bonds in Jan 2010: 1.5%
Bonds in Jul 2011: 10%
When you look at this it is no wonder they cannot afford to pay back their own debt. It is even more worrying when you consider just how much European Banks are considered to lean on each other and the impact this could have on Spanish and Italian Bonds. These two are the lurking beasts that could really ignite the contagion situation and send global markets into panic.
The second round of stress tests are due tomorrow and the market, in my opinion hasn’t shown enough concern. This time round they are supposed to be stricter after so many Banks struggled previously. Like a Rocky Balboa comeback do not be surprised to see a predictable finish and for the tests to expose the Banks even more than before. It was leaked this morning that six Spanish Banks have failed and this is not going to inspire speculators looking to purchase the Euro and even more worryingly the long term implications for the price of Spanish Bonds’ does not look good.
In comparison to the other three PIIGS nations the price of Spanish and Italian bonds has been steady as a rock, but if this creeps up then the fear of contagion will sky rocket. In my opinion this is the key thing that European finance ministers are aiming to control – if Spanish and Italian debt remains affordable it puts all the money thrown at Greece, Ireland and Portugal into perspective. But is this going to happen?
If Spanish Banks are failing the stress tests it makes you wonder just how resistant they are going to be when, inevitably the other three come under more pressure. All this isn’t helped from the credit agencys who are downgrading their debt status quicker than you can say ‘The Euro will not fail’.
I hear a lot of clients saying ‘they won’t let these countries go to the wall, that they can’t’, but I have a sneaky feeling of too little, too late. It certainly isn’t an impossibility let me assure you. If you are uncertain on how the price of Bonds or even the European Stress tests may effect your transfer then get in touch with your Currency Broker as soon as possible, the difference between the daily high and low at the moment has been over 1% – which means a volatile market. You can get in touch with the author directly (James Matthews) for a friendly chat about when you should be considering making your foreign exchange on 01494 787 451.