Anthony Hall
At some point, the financial balance shifts for both the borrower and the lender, but that point in Europe is moving quickly.
Spain, Italy, Greece, Ireland, Cyprus and Portugal all reached a point where an international loan was cheaper than participating in bond markets. Generally, the term "unsustainable" is attached to bonds that yield 7 percent or higher, but "unsustainable" is a political threat as much as anything else. "Unsustainable," might as well mean, "We haven't struck oil lately." All things being equal, striking oil would make 7 percent sustainable, at least temporarily.
For Germany, which is underwriting the European bailout efforts, there is also a balancing point. Surely, Germany economists are up late at night trying to figure out the cost of Greece dropping out of the eurozone. Then there's Spain, which is attempting to change the rules to permit banks to receive international assistance directly. And then there's Cyprus, which also asked for aid this week.
The cost to Germany of Greece or Spain going into default is virtually incalculable. But that doesn't mean there isn't a number out there somewhere, floating in space. But somewhere out there is a balancing point, where the cost of losing the eurozone is cheaper than the cost of keeping it intact.
The political balancing point is in focus. German Chancellor Angela Merkel is currently resting her argument on control of the rescue funds. Illusion or not, Merkel believes that bailing out banks directly represents losing control of the bailouts underwritten by German taxpayers. Consequently, she is turning down the proposal to bailout banks, rather than governments.
In the meantime, Germany is borrowing, too, and its bond yields are the definition of sustainable.
On TradeWeb Wednesday morning, benchmark 10-year bonds in Berlin were yielding 1.54 percent, while in Madrid benchmark securities were yielding 6.87 percent. Comparable U.S. bonds were at 1.63 percent.
The cruel irony, of course, is that investors pulling back from Greece, Spain, and Portugal in fear are looking for a safe place to invest and German bonds are far more appealing at this point.
There's no argument here at all, of course. Germany's gross domestic product is expected to grow at 0.5 percent this year. Germany may have a relatively reasonable debt load, borrowing, even cheaply, is still borrowing. A robust recovery is on everyone's wish list, Merkel included.
In international markets Wednesday, the Nikkei 225 index in Japan gained 0.77 percent, while the Shanghai composite index in China lost 0.23 percent. The Hang Seng index in Hong Kong rose 1.03 percent, while the Sensex in India added 0.36 percent.
The S&P/ASX 200 in Australia climbed 0.75 percent.
In midday trading in Europe, the FTSE 100 index in Britain rose 0.61 percent, while the DAX 30 in Germany added 0.31 percent. The CAC 40 in France added 0.44 percent, while the Stoxx Europe 600 rose 0.52 percent.
