Market Viligantes

The ECB/IMF €750bn bailout package, announced on May 10th, was large enough to buy Real Madrid football club 881 times, or 3.19m homes in Ireland, but it has not impressed the bond markets, according to fund manager Schroders.

The bailout package may have temporarily halted the debt crisis in Southern Europe, but Schroders points out that the larger European bond markets of Italy, Spain and France have seen their spreads to Germany increase.

Schroders commented on this development: “This represents an escalation and broadening of the crisis.”

The bond markets have noted the fault lines that the sovereign debt issue is exposing and governments across Europe may soon find themselves answering to the so-called ‘bond market vigilantes’ rather than their own electors.

Hence the sudden moves by European governments to demonstrate their commitment to tackling debt, even at the risk of weakening growth and causing a ‘double dip’ recession.

No-one wants to be the next Greece, when markets demand penal interest rates and social cohesion is tested to the limit as governments are forced to take drastic action.

Schroders added in its comments that this summer/autumn could see a potential bank funding crisis in Europe, as many European governments have a surfeit of short-term debt that will require refinancing or rolling over.

So what can we expect to see happen as events unfold? At a European economic conference, CoreData heard one ‘bond vigilante’, or fixed income fund manager, say it would be better to see cuts in public spending than tax rises, although the opposite was easier for governments.

He added that the bond markets did not need to see who has “the hairiest shirt” but they did want to see medium-term fiscal credibility.

This could mean a rise in future retirement ages, as well as cutting current spending.

Another, more worrying, perspective came from a presentation by a fund manager at Deutsche Bank.

He traced a line between the debt issues at Iceland and Greece to other European countries and projected it onwards to UK, Japan, the USA and then China; the sovereign crisis is the ‘sum of all bailouts’ over the last 12 years.

As a result, confiscatory taxation, such as the Australian mining tax, is on the increase and EU citizens are predicted to see higher taxation and higher inflation in the future.

Whatever €750bn buys, it is not likely to be a prosperous future for all.