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European Crisis Reached Devastatingly New Lows and Highs

Guest Bloggers: William Doane & John Gabrielski

As stocks plummeted today, the European crisis reached devastatingly new lows and highs.  Spain’s 10-year bond yields reached an all time Euro-era high reaching 7.57 %, and the strength of the Euro dropped to an eleven year low against the dollar at $1.2080. Catalonia became the sixth Spanish region to announce it may need aid from the central government. With six Spanish regions now seeking bailout aid, the looming possibility of a full-blown bailout has sparked wide-spread selling in the major market exchanges. The global sell-off that ensued weighed heavy on the opening of the U.S. markets, leaving the Dow down nearly 235 points, or 1.8%, the S&P 500 down 1.8%, and the NASDAQ with an even heavier 2.4%. The Stoxx Europe 600 also plunged with a 2.4% loss.  “We have been reminded of the hold that the Eurozone has on our markets,” said Quincy Krosby, market strategist for Prudential Financial.

With its borrowing costs surging, Spain has entered its third quarter of consecutive contraction. Despite the approval of the 100 billion Euro aid package for the Spanish banks last week, the aid package failed to keep its bond yields below 7%. Suffering from negative economic growth, there is growing concern over Spain’s ability to recover from its deepening national debt. Instead of supporting the pumping of the money into the nation’s financial sector, the six regions that expressed their need for aid seem to have rescue plans of their own.

The aid package, which was fought for by German Chancellor Angela Merkel, has already been dispersed throughout Spain with little to show for it. Spanish Prime Minister Mariano Rajoy, who has continued to denounce the need for a second bailout, has not convinced investors. With six regions already in need, and a seventh soon to follow, it seems investors are not preparing for “if” their will be aid, instead “how much” aid there will be. Will the Eurozone leaders initiate another 100 billion dollar bailout, or will they vote on an even larger scale bail out to rebuild the economy? Of course, it will be no easy task approving such a bailout, but if it is approved, should the aid be delivered to Spain’s central banks, or the separate regions that expressed their need for aid? A large scale bailout may be the key to breaking the current three quarter contraction streak, but if dispersed poorly, could amount to a hopeless national debt.  Is Germany willing to make a bold move and commit a significant amount to the bailout rather than continued incremental moves?  If so, will the German public stand for it?  The German citizens continue to decry the fiscal irresponsibility of countries like Spain and Greece while they have been prudent in their economic policies.

If there is any saving grace for Germany, it’s been the continued reduction in their cost of borrowing.  The German 10-year yield fell to a record low of 1.127% as investors have flocked to safe havens like the U.S. and Germany. The reduction in Germany’s borrowing costs has created substantial savings which should, to some extent, offset the cost of bailouts funded in part by Germany.  Economist Jens Boysen-Hogrefe of Germany’s Kiel Institute for the World Economy told The Associated Press, “Germany saves about 10 Billion Euro this year alone directly from interest rates.” Just last Wednesday, Germany sold 5 billion Euro in short-term bonds. Germany is surely a safe bet to invest, but will they make the commitment to support the fiscally irresponsible nations at the center of the crisis?