Euro Declines as Europeans Wise Up

It took a while…but the most clueless European is finally figuring out something the most clueless Americans have known for a year or two: They’ve been snookered.

Remember when Ben Bernanke told us that problems in the mortgage market were contained to the subprime sector? Then it became obvious they weren’t contained. But he promised they wouldn’t detonate the credit markets or take down major banks. And so on.

Europeans are living this right now, today. Leaders of the European Union assured them that problems in Greece would stay in Greece. Then the problems spread to Ireland. So EU leaders said if the Irish would just take a bailout, they’d come up with a plan to make sure nothing like this ever happened again.

This week, bond traders are calling their bluff. Yesterday, the yield on Spanish bonds grew from 5.21% to 5.46%. (It’s up again today, to 5.55%.)

Today, the yield on Italian bonds grew to 4.68%. The spread over similar German bonds – the benchmark of reliability – is its widest since 1997, when the euro was still a gleam in the eyes of central planners.

Credit default swaps on Irish debt, Portuguese debt, Spanish debt, Italian debt…they’ve all surged to record highs.

Thus, the euro has slid below $1.30 for the first time in two months. Not surprisingly, gold priced in euros hit a record of €1,059.

Priced in dollars, gold is looking pretty impressive too. The dollar index is merely firming up its position above 81…but gold has surged nearly $20, to $1,386. That’s within $40 of the record set just three weeks ago.

Dave Gonigam
for The Daily Reckoning