Are Eurobonds the Solution?


Author Larry Berman

Posted: 30 May 2012 re-posted from etfcm

Last week Italian Prime Minister Mario Monti suggested that Eurobonds might be the solution that would help calm the financial markets and that German Chancellor Angela Merkel was opening up to the idea. From our point of view, Merkel will be open to anything that gets her elected again next year, much like Obama and Romney will say just about anything to get elected this year.

The political theatre is about to heat up in the US and Germany in the coming months and Main Street will learn, like they did last summer, just how bad things are when the US likely gets downgraded again in early 2013 in absence of a credible plan to significantly reduce the deficit and debt.

But Germany is not the stalwart that Europe believes it is, they are neck-deep in toxic debt too. German Bund yields are falling faster than US Treasuries these days as money is being scared out of the weaker peripheral countries and the stronger ones like Germany are going to have to foot the bill.

Watch German bund yields closely as a signal that investors are sensing that Eurobonds are coming. When Bund yields start to rise, investors are showing concern that Germany may not be able to carry the debt burden of the entire EU. If so, it will be another really big band-aid for a while, but as we have written here many times in the past year, throwing more debt at a debt problem is not a solution. For Monti and Italy, it would be a great help, but will stop well short of fixing the problem. As we have seen in Greece and elsewhere, severe austerity is not being tolerated as an entire generation has been weaned on the government dole which simply needs to stop.

In the US, the political theatre heats up after the Republican convention in late August, after which attention may turn back to see the US is fiscally bankrupt. In the mean time, corporate earnings and outlooks are ever so slightly on the decay…stay tuned.

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