Rising bond yields: would EU bonds end the crisis?

There is an enlightening Spotlight on European Government Bonds with Current State of the Sovereign Debt Crisis in Picture  made by MISH'S Global Economic Trend Analysis.

I think his charts are showing clearly one thing: borrowing costs for EU countries are indeed rising. Actually also the US benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing.

Inquiring minds may interpret the general rise in sovereign bonds yields in three ways: a) growth rates are expected to be higher (valid perhaps for US and possibly Germany where German bund yields have picked up by an almost commensurate amount as have Treasuries.); b) inflation is expected to be higher due to money supply increases and quantitative easing; c) the supply of sovereign bonds is getting above bond vigilantes absorption capacity and willingness to buy at certain levels of risk premia. In all circumstances it appears that debt and deficit to GDP ratios - c) to a) levels - matter to bond vigilantes.

However Mish concludes that any "plan for EU bonds has long been dead as France nixed the idea as well, and the charts show why: Germany and France do not want their borrowing costs to rise". Here I should clearly states that if German taxpayers hate bailing out their own banks they are already also bailing out profligate foreign governments (or indirectly national banks like in the case of Ireland) to bail out their own banks which made bad investments in PIGS sovereign bonds. Those who claim that EU bonds require some EU fiscal policy do not actually see that taxpayers are already being united by those strange mechanisms put in place to save banks...

To me the charts just show that borrowing costs are rising for everybody anyway, and that, together with other reasons, make the case for EU bonds issuances ever stronger. Should be evidence that Germany and France pay higher rates on their borrowing, I believe that a mechanism of compensation could be envisaged for the interest payments on respective countries EU bonds. It would instead be a pity if we discover that actually what makes EU yields to rise is exactly the unclear set up of the European Stability Mechanism and the perpetuation of the European Financial Stability Facility (EFSF), which might have moral hazard and an vicious circle intrinsic defects.

Where are the "good banks"?

Followers of this blog may remember the debate about "bad banks" and "good banks" and lemon banking system. Looking at the table below from BIS Quarterly Review you may realize that there are now quite a number of bad banks in the Euro zone as sovereign bonds start to become "toxic assets". A similar picture was published here sometimes ago. What is adding insult to injuries (particularly for taxpayers) is that we are now bailing out countries to bailout banks...

 The following table shows yesterday's close 10-year sovereign spreads (against 10 year German bunds). I wrote before that it does not make sense to have austerity plans whose savings are immediately spent on sovereign bonds interest payments and increasing spreads.

			Yesterday’s Close
France			0.347
Italy			1.653
Spain			2.473
Portugal			3.435
Greece			8.86
Ireland			5.371
Belgium			1.036

Prof. Buiter defines it "European sovereign debt kerfuffle’. Shall we ask Buiter to revamp the idea of "good banks"? It appears quit clear now that the problems is that European banks are too much exposed to sovereigns of different PIIGS countries. There are too many PIIGS to bail (and to make them fly).

Ireland should have been a case study for the creation of "good banks" instead of bailing it out to support the lemon banking system...We should break the vicious circle (I call it cross-countries Ponzi scheme) banks-sovereign-banks. Expand the EFSF to €1.7trn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium is adding insult to injuries...Where EFSF money is coming from? Out of thin air I suppose...
I did not expect that proposal from Buiter...Does he want now to continue to support "bad banks" either in Ireland or Spain? I would say 1) Initiate sovereign and bank restructuring "Taking A Bite Out Of Bondholders", either through haircuts or financial transaction tax. In this way "good banks" will be promoted particularly in Ireland or where most needed. I hoped the stress tests were made to rightly  and really discover lemon banks instead of perpetuating the status quo ante. Where needed, transform banks' bondholders in shareholders instead of getting taxpayers money via governments to support the banks and continue to issue sovereign bonds for that purpose; 2) Start immediately EU bonds common issuances 3) Introduce a EU financial transaction tax to cover initially EU issuances and budget.

We read that Eurobonds idea is gaining in momentum as pressure on Merkel increases ahead of European Council. It's nice to read that Eurobond proposal is now politically promoted by the daughter (Mme Aubry) of  Commission President Jacques Delors, who proposed it some 17 years ago...It's true that somebody  have been sleeping at the wheel for several years...

UPDATE:  Prof. Buiter suggests to get out ‘big bazooka’: Expand the EFSF to €1,700bn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium?
It's not a bazooka it's another naked gun on the table, it's just smell of fear...
It creates a vicious circle and moral hazard problem if a number of countries get under EFSF "protection". Debt service will in average increase for several countries as bondholders will sell longer-term bonds of few countries, thus making more likely for a country to ask for EFSF "protection" programme or get a higher risk premium on its sovereign . What if it does not work? Bondholders will get a haircut anyway so the sooner the restructuring the better....

European debt crisis - Part II

I keep writing that the only way out to the European debt crisis and the much feared domino or contagion effects is to a) stop the Ponzi scheme of public debt and its market for lemons of sovereign debt along with its EU money creation, b) restructure the debt and c) issue new one at EU level. Moreover a tax on financial transactions could start to help funding the EU budget and some EU governments. A financial transaction tax giving revenues for some 200 billions Euro per year could replace several austerity measures and aid packages to single countries.
When EU foreign currencies were attacked by speculation we got the Euro to replace them. If now we get sovereign bonds to be attacked we need the EU bond to replace them.
If we still are believers in the EU project we need now more Europe and European economic measures not less to sustain the project. The bailouts are national and economic nonsense. Let’s see when it comes to bigger countries like Italy, considered so far a Black Swan (which is not)…PIGS will not fly any more...