Friday, May 13, 2016

The Debt Situation In Europe
Is Growing By The Day
Yra Harris points out the growing risks & crises in the banking sector of Europe .. "What’s even more disconcerting for sovereign bond buyers is in July 2012 when Italian 10-year notes were suffering under the threat of the end of the EU, the yield was above 7% and the Italian debt-to-GDP ratio was 123.3%. Today, at considerably lower yields, which makes debt servicing costs minimis, the debt-to-GDP ratio has grown to 132.7%. Growing debt-to-GDP ratios while servicing costs drop is a problem plaguing France, Spain, Portugal and most certainly Greece. The debt situation in Europe worsens by the day even as the ECB manipulates borrowing costs lower. This issue will be further complicated in June when the ECB begins purchasing investment grade corporate bonds. Many global corporations are rushing to raise cash in Europe through bond offerings aware that the ECB will be pushing rates ever lower. Let’s raise cash in the EU and do stock buybacks in the U.S. However, if the EURO GOES HIGHER THE COST OF BUYING BACK THE DEBT WILL INCREASE. It seems that the globalization of capital in the extreme will present Mario Draghi with some unintended consequences. The ECB is taking failing assets onto its balance sheet to compensate for the risk involved. (This is a situation that is also plaguing insurance companies and pension funds.) The failure of markets to correctly price risk, as warned by Jeremy Stein, is providing fuel for the debt train. Patience for all who buy a cheap ticket."
LINK HERE to the commentary

No comments: