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Wall Street Still Thinks Germany Is Bluffing

Tech|11/15/2011 @ 8:00AM
Wall Street Still Thinks Germany Is Bluffing

The current bond market havoc in Mediterranean countries is only compatible with S&P at 1,250 if you believe that the European debt market is simply wrong about Italy and Spain. Either the US equity market or the European debt market is making a profound miscalculation here. The key question is whether Germany will bend to accept a titanic new sovereign debt purchasing program.

Yesterday resembled curiously an October Monday one month ago. Both days followed a week of increasing speculation about a massive new European bail-out package involving at least a trillion euros for buying bonds of troubled countries like Italy and Spain. And both days were characterized by seemingly coordinated German efforts to clearly reject such a package.

We have now seen the same pattern repeat several times – yesterday, public German resistance towards increased buying of sovereign debt involved the power trio of Angela Merkel, Jens Weidmann and Klaas Knot. No wonder the Spanish and Italian debt markets are again showing signs of real distress. Knot stated very pointedly that the support for Italian debt market has to be temporary. The Bundesbank power Weidmann was just as clear in his opposition towards easy money policy.

Yet S&P still sailed above 1,250 at the Monday close

– far above the sub-1,100 levels of early October.

The last time German bankers and politicians attacked the concept of bigger sovereign debt buying, the Spanish 10-year bond yields were below 5.40%. Today, they spiked above 6.30%. Italian debt probed 7.00% again today. The European support buying of distressed sovereign debt this autumn has not prevented the key yields from spiking. The only medicine that might work is notably higher levels of debt purchases – something Germans keep opposing.

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