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EURO INTEREST RATES AND THE INEFFICIENT MARKET AT WORK

14 December 2011 by Surly Trader 6 Comments

By Surly Trader

The BBC released a series of graphs from the top economists that highlight and summarize 2011 from a visual standpoint.  My personal favorite shows the interest rates of the European Monetary Unit (EMU) members (see figure 1).

There are a few things that this graph really brings to my mind.  The first is that markets can be horribly wrong for an extended period of time.  Do I really believe that 2008 and the bankruptcy of Lehman created the disparity between the countries’ default probabilities?  Likewise, do I really believe that the countries became equal in credit risk when they merged into the EMU in 1999?

In addition, if there was an improvement in certain fiscal optics in 1996-1999 before the currency merger, were they actually real?  I think it is rather obvious that the countries with the worst fiscal issues “cooked the books” so that they could join the Eurozone currency pact and ride on the backs of the more fiscally disciplined brothers.  Do I feel sorry for Germany and France?  Absolutely not.  In fact, they did not abide by their own fiscal rules in 7 of the 11 years while in the Eurozone.


(Figure 1 - Did things really change in 1999?)

Surly Trader

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Comments
  • Nils Nils

    That’s the way of the EU, everyone trying to screw the other over.

    12/14/2011 at 1:06 AM
  • Very Serious Sam

    As I say since years: considering that there were de facto eurobonds between 2001 and mid 2008, what should they achieve now that they didn’t before? Right: nothing. Legal and other issues aside, this is the major reason why I am strictly against eurobonds.

    The GIPSIFs did all the years not use the low refinanzing rates to develop a sustainable business model. No chance it would be different next time the get their hands on cheap money.

    12/14/2011 at 1:16 AM
  • Hamlet

    Those BBC graphs are worth checking out – there are many points that will chime with the MMT community. Eg in graph 6, Richard Koo notes the UK sectoral balance, and graph 7 hammers home the point about private debt vs gov’t debt.

    Some contributors discussed their material at the end of the Beeb’s newsnight programme 13th Dec:

    http://news.bbc.co.uk/1/hi/programmes/newsnight/default.stm

    12/14/2011 at 5:08 AM
  • Octavio Richetta

    Ironically, this post reminds me of LTCM, which made a huge bet that interest rates in the EUM should converge as theybmoved towards a single currency, and went under because theybmissed the timing of the event. Once again, the challenge in forecasting is most often than not forecasting the timing of the event, not the event itself.

    12/14/2011 at 6:22 AM
    • VII VII

      @ Octavio

      “reminds me of LTCM”

      Overlay the DXY from 95 and see what happened to the DXY during that period.
      This has not gone well for Global Risk Assets and may not going forward. The DXY is undervalued by a wige margin. As Europe gets shaken out so will risk assets as the DXY climbs. Gold support was 1610..this isn’t good for the yellow metal bulls.
      The only trouble is the places to find shelter are getting crowded. Still a couple of rooms left in the Bond Hotel. But..let’s not stay too long. Maybe when Raymond James sends me an e-mail recomending some bond funds I’ll know to go long.

      12/14/2011 at 12:52 PM