Anything left in the tank?

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Trading On Europe’s Empty Bag Of Tricks – Seeking Alpha

Trading On Europe’s Empty Bag Of Tricks
July 11, 2012 | 2 comments | about: FXE, includes: DRR, ERO, EUO, ULE, URR

At the moment of writing (Monday morning) Spanish yields are above 7%, that’s clearly not sustainable for an economy with 25% unemployment, a property bust, a banking crisis and a deep recession cutting severely into tax receipts.

While Spain could, in theory, keep funding itself at these rates for quite some time, this clearly puts them on an unsustainable public finance path, so realistically, something has to be done pretty soon, but what?

First of all, one has to realize that this crisis is to a large extent systemic. Spain had a budget surplus and half the public debt/GDP ratio that Germany had in 2007. The Spanish housing bust and subsequent deleveraging of household and bank balance sheets is producing the savings that would normally keep rates low in Spain, as it does in the UK.

The fact is, Spanish savings can flee to Germany without incurring any exchange rate risk. Indeed, if you’re really pessimistic and see Spain leaving the euro, there is every incentive to park your money there. Hence you see the capital outflow from where it’s needed to where it’s not needed (German yields are on record lows already). [Read on here]