Endless Auction-Driven Downside

 | Nov 17, 2011 | 7:03 AM EST
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If you know that every bond auction of almost every country in Europe is going to go badly from now on, if you know that any particular country, like Spain or Italy, has endless financing needs and no institution can afford to show that it has that paper on the books, then you are set up for an endless spiral down. You can't break it. It's as if every day a new Macondo goes off and the only way to stop it is to let it run out.

You can see how untenable it is all is just by watching the results of a given auction -- like the Spanish one this morning for 10-year paper. The government wanted to raise 4 billion euro. There was only demand for 3.5 billion and the interest rate skyrocketed to 6.975% from much lower levels. All-around bad. No redeeming features, except that you know this auction will fare better than the one after it.

With no plan for what to do with all of the debt to be financed, with no hope of the economy coming back soon, with no ability to put aside differences, the euro world is pretty much an unmitigated disaster. So you can see why we are totally hostage: because as strong as our system is, the idea that there is another one that is going down the tubes pretty quickly across the ocean is very daunting.

Now, you have to figure there is some price that the paper makes sense to buy. But we know from what happened to Greece that we never seem to hit that price and we certainly aren't going to hit it in the primary market. You would normally want to buy bonds when the economy is weak, but not when it is so weak that the issuer can't pay the coupon.

So we spiral and we spiral with every auction now turning into a down 1% rout at a minimum, and there are auctions as far as the eye can see and not enough money from different entities to buy them all.

Ways out? Default, which would be devastating but would allow for a new beginning somewhere down the road. Restructuring, budget reform, lower standard of living, increased savings rate to buy the bonds? Obvious. But have you thought about the problems we're having here with our own committee?

Makes No. 1 seem more likely all the time unless the policymakers come up with something that works. Lately, however, it doesn't seem so much like they are squabbling as they are recognizing that nothing's going to work, so maybe just let "it" happen, whatever the heck "it" is.

Then maybe someone will think of something.

Did I say vague, disheartening and frustrating?

All three.

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