Unsettling News on the Unresolved Eurozone Crisis

by Eric Fry.

We are not entirely sure what a “resolved” Eurozone crisis is supposed to look like, but we are pretty sure it is not supposed to look like the chart below…

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A resolved crisis is not supposed to feature soaring Spanish bond yields and rising credit-default swap prices. In fact, the squiggles on this chart below may be the most disturbing images to emerge from Spain since Salvador Dali’s melting clocks.

Less than two months after the financial leaders of the Western World — you know who you are — informed the rest of us that they had vanquished the euro crisis, it has flared up anew in the “peripheral” credit markets of Europe. Peripheral is the polite term for the P.I.I.G.S. nations of Portugal, Italy, Ireland Greece and Spain.

In Spain, the yield on 10-year government bonds jumped to nearly 6% Tuesday — the highest level since early December. Meanwhile, the price of insuring a 5-year Spanish government bond against a default (i.e. the 5-year CDS price), jumped to within a whisker of a new record high.

These are not the data points of confidence and comfort; these are the data points of resurgent distress. Bond yields don’t soar when investors trust the borrower; and default insurance doesn’t jump to near-record levels when investors are confident they will be repaid.

Bond yields and CDS prices are climbing throughout the financial markets of the peripheral European nations. Meanwhile, share prices on the European continent are tumbling. Despite a brisk start to the year, several European bourses have slipped into the red for 2012.

Perhaps this rocky price action reflects some “healthy” profit-taking and nothing more. On the other hand, healthy profit-taking can easily morph into a great big bear market when the underlying fundamentals are as suspect as the balance sheets of the PIIGS governments.

In other words, as we have mentioned more than once in this column, bankrupt entities tend to go bankrupt. So any time an investor lends money to an insolvent entity, he is playing a game of chicken…or as they would say in Spain, un juego del pollo.

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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