Europe back in the Crisis?

Countries are worried about plummeting bond prices – Again.

Just as we thought it’s all over (speaking of the Crisis, what else did you expect?) bond prices of some European countries plummeted anew. But let’s face it: The crisis we just wanted to be over has a scope that dramatic, that thoughts about light at the end of the tunnel are just wishful thinking.

As Financial Times Deutschland (FTD) states in its 11/11/2010 print edition: bond prices of Portugal and Ireland have fallen big time. It’s not that it wasn’t foreseen or not anticipated in any way, but once it happens, other countries have ideas of bankruptcy on a national scale. That would be expensive and embarrassing for the poor states.

For your information: there are at least two crucial figures concerning bonds: price and return (yield) over a certain period of time. Falling prices may imply that demand has decreased because investors don’t see value for money, in other words, they may think that the respective country will not be able to buyback its bonds. We don’t know if thats the case concerning Portugal and Ireland. All we know is that bond share prices, a very important indicator for a nations economic constitution, have dropped which scares people.

Bloomberg notes additional figures. Germany for instance is Europe’s benchmark for bond prices. If the gap of ones country bond price becomes larger compared to German price, its usually a sign for bad economic performance. The gap between Greek and German bonds for example has climbed 13 basis points (bp) to 924bp. Spread of spain rose to 212bp, ireland 651bp (yields 8.77% now) and Portugal 484bp. Leaving Greeks performance as the worst in EU comparison.

FTD furthermore states that concerning countries, which already benefit from a European monetary rescue scheme, can introduce certain measurements to expand their duty in buyback bonds they once emitted. I.e. extend running time or paying a fixed rate at the end of term instead of a pre determined interest rate. Remember, the interest rate for bonds is the second crucial factor, now maybe out of order which I think is just terrible.

Why buying bonds if you are not sure if you get what you paid for? A pre- fixed yield!

So in the end we have several factor which might give right to the most pessimist pundits. Falling prices for bonds and override regulatory mechanism. If I was ironically speaking I’d say that this shouldn’t bother the countries as long as we have a payers such as Germany or Sweden with healthy economic situation, able to establish a rescue scheme.

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rudi2020