EU Politicians Seek to Unload PIIGS Bonds. Two Steps You Should Take Now …

Since last Friday all eyes have been geared toward the catastrophe in Japan. That’s indeed understandable. However, there has been another important development with far-reaching implications that is worth discussing today …

While the media was totally focused on the Japanese disaster, German Chancellor Merkel and her European brethren insidiously decided to make a major change within the European Financial Stability Facility (EFSF), the EU’s euro rescue fund …

That change will let the European Central Bank (ECB) stop buying sovereign bonds from debt-ridden PIIGS countries like Greece. And it could transfer all those bonds it’s currently holding to the EFSF.

The decision came as a major surprise, since discussions of this controversial topic were officially scheduled to take place at the end of March.

So why now?

There Could Be Two Reasons …

First of all, the European bond market started sending stress signals again. As you can see in the chart below, interest rates of Greek 3-year government bonds shot up from 13 percent in January to 18 percent by March 10.

And last week Portugal was forced to borrow money at 5.99 percent, up nearly 2 percentage points since September — an unbearable leap.

These renewed bond market turbulences may have been an important driver for this emergency summit.

But there could be a second, more cynical explanation for the timing …

German Chancellor Merkel faces some important elections. And the concept of Germany as the main paymaster for troubled PIIGS is very unpopular amongst German tax payers.

And then German Finance Minister Schäuble said that the EFSF was too small and had to be increased.

Consequently, the EFSF’s funding was increased from $347.5 billion to $611.5 billion. Plus, it will now be allowed to buy bonds directly from ailing European governments. To crown this outgrowth of stupidity, it comes without any coercive rule to detain former and probably future sinners from further fiscal recklessness.

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Incentive for Profligacy
Leads to More Inflation

Unrestricted bailouts lead to more profligacy, more government debt, more inflation, and finally to more hardship somewhere down the road. There is absolutely no incentive for any politician to return to prudent policies. And the prudent ones will be punished since they will have to pay the bills of their imprudent brethrens.

European politicians have just decided to dig deeper into the hole they find themselves trapped in. And a return to prudent fiscal and monetary policies has become even less likely than it was before.

Just like the U.S. dollar, the euro is poised to take an extended beating.

By taking on more debt, Europe is following in the U.S.’s footsteps, which will lead to a weaker euro, higher inflation and rising interest rates.

So unfortunately the euro is no alternative to the equally beleaguered dollar. And European sovereign debt bonds are no better than longer-term U.S. Treasuries. They both seem to be doomed.

All of this tells me that interest rates are sure to rise — both in Europe and in the U.S. And I have two ways you can use to potentially profit …

The first, is with ProShares UltraShort 20+ Year Treasury ETF (TBT). This fund seeks daily investment results that correspond to twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index. That means for every 1 percent the index drops, TBT is designed to rise 2 percent.

And the second, learn more critical background information about money printing, asset bubbles, opportunistic central bankers, and government debt and what this all means for your financial health. I suggest you get a copy of my new book, The Global Debt Trap. Click on your choice of bookseller to order it online — Amazon, Barnes & Noble or Books-A-Million — or stop by your nearest bookstore.

Best wishes,

Claus

Claus Vogt is the editor of the German edition of Safe Money. He is the co-author of the German bestseller, Das Greenspan Dossier, where he predicted, well ahead of time, the sequence of events that have unfolded since, including the U.S. housing bust, the U.S. recession, the demise of Fannie Mae and Freddie Mac, as well as the financial system crisis. Claus is currently the editor of Million-Dollar Contrarian Portfolio and has just completed his book The Global Debt Trap.

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ECB's "One Size Fits Germany" Policy; Portugal 10-Yr Debt at Record Yield; Greece, Ireland Near Highs; 3 Hikes by Year End? Rate Hikes to Stress PIIGS

ECB president Jean-Claude Trichet uses the word "vigilance" as a market signal he is going to hike. Trichet has used that word a couple of times recently.

Today, outgoing German Central Bank president Axel Weber expressed agreement with Trichet regarding "vigilance", going so far as to say he would not correct the market's expectation of 3 hikes by year-end.

Please consider Axel Weber: Markets have understood ECB correctly

Markets have understood the European Central Bank's policy signals, ECB policymaker Axel Weber said on Tuesday, adding he did not want to correct expectations for rates to be at 1.75 percent by year's end.

"I think President Trichet said the right thing: it's possible but not on auto-pilot," Weber told reporters when asked if a rate hike should be expected in April or May.

"I think markets have understood this kind of language, which is a bit stylized, in the past very well. And I think they've got it this time."

Asked if he was comfortable with market expectations that ECB rates will rise from their current record low of 1 percent to 1.75 percent by year's end, Weber replied: "I wouldn't do anything to try to correct market expectations at this point."

One Size Does Not Fit All

Pray tell what inflation is the ECB worried about?

One cannot find it in Greece, Spain, Ireland, or Portugal, where various austerity measures have reduced both jobs and wages.

Here's a better question: Where was the ECB when credit was exploding in Spain and Ireland, fueling enormous property bubbles?

Nowhere is where. Inflation in Germany was close to 0%.

One Size Fits Germany

It was in the best interest of Germany to ignore reckless credit expansion elsewhere. Now, because gasoline prices are soaring in the wake of a crisis in Libya and the Mid-East, Trichet wants to be vigilant.

Here's the deal. This has nothing to do with the price of oil or the price of anything else. Trichet is using the price of oil as an excuse to do what he wants to do, and that is hike.

Why does he want to hike? Because recent wage negotiations in Germany have headed much higher as noted by Factbox.

Public Sector 3 PercentChemical Industry 7 PercentGerman Construction Unions 5.9 Percent
Wages have collapsed in Ireland and Greece, and are lower in Spain and Portugal. However, Germany and France call the shots because they have the largest economies.

Those rate hikes will increase the already significant stress in the rest of the Eurozone.

10-Year Yield Greece: 12.331%

10-Year Yield Ireland: 9.416%

10-Year Yield Portugal: 7.558%

10-Year Yield Spain: 5.381%

10-Year Yield Italy: 4.893%

10-Year Yield Belgium: 4.279%

10-Year Yield France: 3.623%

10-Year Yield Germany: 3.273%

Sovereign Debt Spread to Germany Jan 2010-Mar 8 2011
CountryJan 01May 07Dec 30Mar 08
Portuguese, Irish, and Greek sovereign debt yields are at or near record highs as are yields relative to Germany. Moreover, the ECB's "One Size Fits Germany" policy is not going to help those countries any.

The ECB ignored rampant inflation in Spain and Ireland, and other problems elsewhere because it suited the interests of Germany and France at the time. Now the ECB is ignoring rampant deflation in those same countries because it suits the interest of Germany and France.

The ECB is not concerned with such matters or what countries it wrecks. It is just concerned that Ireland, Greece, and Spain pay back debt owed to German and French banks.

Here is the key question: How long can the other countries survive in a one size fits Germany setup?

For more on the mess in Europe including a look at gasoline prices please see

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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