Chart of the Day

Below is the VIX and the DOW on a weekly chart back to the end of 2005. There's a lot going on but notice the circles that represent moments of very low volatility (read: investor complacency). The vertical lines demonstrate that these moments of low volatility are followed by a heavy selling periods on four occasions. The last circle is where we are now.

Don't Shoot The Messenger

The complete opinion piece by Julian Assange in The Australian:

WIKILEAKS deserves protection, not threats and attacks.

IN 1958 a young Rupert Murdoch, then owner and editor of Adelaide's The News, wrote: "In the race between secrecy and truth, it seems inevitable that truth will always win."

His observation perhaps reflected his father Keith Murdoch's expose that Australian troops were being needlessly sacrificed by incompetent British commanders on the shores of Gallipoli. The British tried to shut him up but Keith Murdoch would not be silenced and his efforts led to the termination of the disastrous Gallipoli campaign.

Nearly a century later, WikiLeaks is also fearlessly publishing facts that need to be made public.

I grew up in a Queensland country town where people spoke their minds bluntly. They distrusted big government as something that could be corrupted if not watched carefully. The dark days of corruption in the Queensland government before the Fitzgerald inquiry are testimony to what happens when the politicians gag the media from reporting the truth.

These things have stayed with me. WikiLeaks was created around these core values. The idea, conceived in Australia, was to use internet technologies in new ways to report the truth.

WikiLeaks coined a new type of journalism: scientific journalism. We work with other media outlets to bring people the news, but also to prove it is true. Scientific journalism allows you to read a news story, then to click online to see the original document it is based on. That way you can judge for yourself: Is the story true? Did the journalist report it accurately?

Democratic societies need a strong media and WikiLeaks is part of that media. The media helps keep government honest. WikiLeaks has revealed some hard truths about the Iraq and Afghan wars, and broken stories about corporate corruption.

People have said I am anti-war: for the record, I am not. Sometimes nations need to go to war, and there are just wars. But there is nothing more wrong than a government lying to its people about those wars, then asking these same citizens to put their lives and their taxes on the line for those lies. If a war is justified, then tell the truth and the people will decide whether to support it.

If you have read any of the Afghan or Iraq war logs, any of the US embassy cables or any of the stories about the things WikiLeaks has reported, consider how important it is for all media to be able to report these things freely.

WikiLeaks is not the only publisher of the US embassy cables. Other media outlets, including Britain's The Guardian, The New York Times, El Pais in Spain and Der Spiegel in Germany have published the same redacted cables.

Yet it is WikiLeaks, as the co-ordinator of these other groups, that has copped the most vicious attacks and accusations from the US government and its acolytes. I have been accused of treason, even though I am an Australian, not a US, citizen. There have been dozens of serious calls in the US for me to be "taken out" by US special forces. Sarah Palin says I should be "hunted down like Osama bin Laden", a Republican bill sits before the US Senate seeking to have me declared a "transnational threat" and disposed of accordingly. An adviser to the Canadian Prime Minister's office has called on national television for me to be assassinated. An American blogger has called for my 20-year-old son, here in Australia, to be kidnapped and harmed for no other reason than to get at me.

And Australians should observe with no pride the disgraceful pandering to these sentiments by Julia Gillard and her government. The powers of the Australian government appear to be fully at the disposal of the US as to whether to cancel my Australian passport, or to spy on or harass WikiLeaks supporters. The Australian Attorney-General is doing everything he can to help a US investigation clearly directed at framing Australian citizens and shipping them to the US.

Prime Minister Gillard and US Secretary of State Hillary Clinton have not had a word of criticism for the other media organisations. That is because The Guardian, The New York Times and Der Spiegel are old and large, while WikiLeaks is as yet young and small.

We are the underdogs. The Gillard government is trying to shoot the messenger because it doesn't want the truth revealed, including information about its own diplomatic and political dealings.

Has there been any response from the Australian government to the numerous public threats of violence against me and other WikiLeaks personnel? One might have thought an Australian prime minister would be defending her citizens against such things, but there have only been wholly unsubstantiated claims of illegality. The Prime Minister and especially the Attorney-General are meant to carry out their duties with dignity and above the fray. Rest assured, these two mean to save their own skins. They will not.

Every time WikiLeaks publishes the truth about abuses committed by US agencies, Australian politicians chant a provably false chorus with the State Department: "You'll risk lives! National security! You'll endanger troops!" Then they say there is nothing of importance in what WikiLeaks publishes. It can't be both. Which is it?

It is neither. WikiLeaks has a four-year publishing history. During that time we have changed whole governments, but not a single person, as far as anyone is aware, has been harmed. But the US, with Australian government connivance, has killed thousands in the past few months alone.

US Secretary of Defence Robert Gates admitted in a letter to the US congress that no sensitive intelligence sources or methods had been compromised by the Afghan war logs disclosure. The Pentagon stated there was no evidence the WikiLeaks reports had led to anyone being harmed in Afghanistan. NATO in Kabul told CNN it couldn't find a single person who needed protecting. The Australian Department of Defence said the same. No Australian troops or sources have been hurt by anything we have published.

But our publications have been far from unimportant. The US diplomatic cables reveal some startling facts:

► The US asked its diplomats to steal personal human material and information from UN officials and human rights groups, including DNA, fingerprints, iris scans, credit card numbers, internet passwords and ID photos, in violation of international treaties. Presumably Australian UN diplomats may be targeted, too.

► King Abdullah of Saudi Arabia asked the US to attack Iran.

► Officials in Jordan and Bahrain want Iran's nuclear program stopped by any means available.

► Britain's Iraq inquiry was fixed to protect "US interests".

► Sweden is a covert member of NATO and US intelligence sharing is kept from parliament.

► The US is playing hardball to get other countries to take freed detainees from Guantanamo Bay. Barack Obama agreed to meet the Slovenian President only if Slovenia took a prisoner. Our Pacific neighbour Kiribati was offered millions of dollars to accept detainees.

In its landmark ruling in the Pentagon Papers case, the US Supreme Court said "only a free and unrestrained press can effectively expose deception in government". The swirling storm around WikiLeaks today reinforces the need to defend the right of all media to reveal the truth.

Julian Assange is the editor-in-chief of WikiLeaks.

Here is a defense (sort of) of Julian Assange by Glenn Beck of all people!

Some China data

I have always been deeply suspicious of official Chinese GDP data. There are other metrics that often give a much better idea of economic performance. Here are a few.

Chinese electricity production to 31 October:


Production generally peaks in December and picks up in February. However, production has fallen 15.77% from 30 September to 31 October.

China Crude Imports to 31 October:


Crude imports have fallen off a cliff.

China Coal Imports to 31 October:


Imports have fallen 20% from 30 September, but coal imports from Australia have increased 7% Big losers are Indonesia.

Here are Chinese coal imports from Australia back to 2005:


Australian Coal Exports to 31 October:


Australian coal exports are always and everywhere a Chinese phenomenon.

China Coal Production to 31 October:


Domestic coal production is ramping up.

The backdrop to these charts are the quantitative tightening methods that China is undertaking. These include price controls, increased reserve requirements at banks and the curtailment of loan books, and the prohibition of speculation in certain commodities. The Thomson Reuters CRB Index is back near its 2010 highs and news from China is that tightening methods will continue and we shouldn't discount the chance of a rate rise. This from the New York Times:

BEIJING — China will tighten its monetary policy next year, the country’s leaders said Friday, a sign that they are increasingly concerned about inflation and an overheated economy.

The move, announced in an article by Xinhua, China’s official news agency, comes as other nations, including the United States, continue to grapple with a global recession.

Xinhua reported that the Politburo, the elite team led by nine members at the top of the Communist Party hierarchy, had decided that China’s monetary policy should shift “from relatively loose to prudent next year.” The article also said China “will continue its proactive fiscal policy,” meaning that investment spending would not be severely curbed.

Given that fixed capital formation has been responsible for much of Chinese GDP growth, this doesn't bode well for Chinese GDP numbers in 2011. Of course this is part of a much needed and lengthy rebalancing process whereby China becomes a modern consumption-led economy. However, the prevailing investment thesis is that things will return to the way they were with China providing the credit for Western consumption. Both can't be right.

Cyclical vs. Structural

Friday's horrible miss of job numbers in the US not only highlights how fragile and unsustainable the current "recovery" is, but also points to the critical question: how many of the unemployed in the US are unemployable, and at which point in the post-recessionary period to the jobless become that way for life? Another point to examine is whether the jobless recovery after 2001 has fed into the current stubborn levels of unemployment. How many workers retrained following the tech crash and entered the booming housing market? If I may, let me add another question - will the natural rate of unemployment change in the US following this recession?


The US isn't the only country suffering from this phenomenon, Spain and Ireland experienced a property booms of equal proportions. Unemployment has leapt from 8% in 2007 to 20% this year in Spain. Ireland's rate has gone from 4.5% to 13.5% over the same period.

Certainly there are some skills that, given the nature of this debt deleveraging cycle, are no longer wanted. Home construction workers and mortgage originators spring to mind. However, the cyclically unemployed can become unemployable if they are out of work for long enough. The following chart from a 2008 paper by Robert Shimer (H/T NYT) of the University of Chicago shows the probability of reemployment falling as the length of unemployment grows:


There are famous examples in history of structural unemployment - from the industrial revolution to coal miners in the 1980s in the UK - and each case represents a significant problem for government. The deal reached with Republicans today by President Obama on tax cuts was only achieved by the GOP agreeing to extend benefits to the long-term unemployed.

The strength of the hysteresis effect on unemployment will become more self-evident over the next two years. Don't expect the rate to fall in the US any time soon. I'll finish with this chart of the employment to population ratio in the US. There is a long way to go.

Even More Euro

Reports of the EU sovereign crisis containment are greatly exaggerated.

Two days of equity market rallies and tightening bond spreads don't actually mean the worst is over. The conflation of sovereign default and bank solvency in the EU periphery is not something that is tidied up by two days of ECB press conferences and large scale bond purchases. Full marks to Jean Claude-Trichet, however, the man is a master of the media. Even as he uttered that the Securities Markets Program would be 'ongoing' (H/T FT), the ECB agencies began buying huge swathes of periphery debt, Portuguese and Irish bonds in particular.


Consider the chart above, it shows the correlation between Spanish 5 year CDS and those of BBVA and Banco Santander. Firstly the massive narrowing of spreads over the last two days is distinctly visible, but the main concern is how tightly correlated these lines are.

Deutsche Bank shows this correlation to be close to 100% and this presents an interesting issue of conjoined sovereign and financial sector risk. European banks need to finance €700bn for redemptions and interest in the next three years. This from DB back in June (H/T FT):

According to our equity research team, European banks need to roll-over approximately EUR700bn per annum over the next three years. Due to increased concerns about European sovereigns and lingering concerns about the overall level of capital in the European banking system, the ability of banks to access term funding has been curtailed . . . The inability to access capital markets is forcing weaker banks to be increasingly reliant on ECB funding which could potentially exacerbate their ALM mismatch (especially as the ECB has so far refrained from reintroducing the 1Y tender), and lead banks to deploy their balance sheet more conservatively.

The funding constraints for European banks are having an impact on asset prices and liquidity. Firstly, peripheral sovereigns are becoming increasingly dependent on their domestic banks to absorb new issuance while banks are increasingly dependent on sovereign support. The feedback loop has been highlighted a number of times in the past few months as a ratings downgrade of a sovereign is followed by a ratings downgrade of a number of domestic banks.

...

Nonresidents have reduced their holdings of Spanish government debt by about EUR 3bn since January this year. With over EUR 209bn (close to 45% of total outstanding debt) still held by non-residents a further loss in confidence and selling from this investor base could increase the pressure on Spanish government debt. In this context the recent although only marginal decline in the holdings of government securities of Spanish MFIs is worrying. Over most of the crisis Spanish government bonds have been well supported by domestic banks. If capital/liquidity pressures force Spanish MFIs to further reduce their holdings of government securities at the same time as non-residents are reducing their holdings it could result in a self reinforcing dynamic, push yields to extreme levels making it increasingly difficult for Spain the access the market.

The situation is further exacerbated by the issuance needs of the Spanish banking sector itself. Spain’s banks need to refinance in excess of EUR 40bn over the rest of 2010 and about EUR 180bn in 2011-2012. The recent ratings downgrades and consolidation amongst the savings banks is likely to reduce the appetite for the Spanish banking sector to expand their balance sheet. It thus becomes critical to ensure that a quick and credible recapitalisation of the Spanish banking sector via the FROB takes place before the funding situation for the Spanish sovereign becomes prohibitive.

In the height of the crisis, banks had access to the ECB's emergency lending measures and could borrow money very easily at 1%. Consequently, as in the US, the carry trade of borrowing from the ECB at 1% and investing in their own government bonds was the best game in town. The result is that many Spanish banks now have enormous amounts of their own government's paper, which is increasingly unpopular.

That there might be natural longs looking to exit positions is a given and explains the steady rise in the yields of many sovereigns. The trouble for the ECB is that there interventions seem only able to scare away shorts and stem only the most explosive widening moves in yields. The real aim should be to create an environment with ample liquidity and confidence to attract new natural longs like pension funds. Here are Morgan Stanley’s Elga Bartsch and Joachim Fels on this issue.

It is important to note that the market moves largely reflected selling by long-only investors trying to reduce their exposure, rather than speculative short-selling. We re-emphasise the point that our colleague, Laurence Mutkin, already made a while ago: the bonds of several peripheral countries, while still being government bonds in name, no longer offer the advantages of a government bond – safety, liquidity, low volatility and a negative correlation with risky assets… Hence, investors running a traditional government portfolio are exiting those markets. In short, peripheral government bonds have become an asset class in search of a new investor base.

In light of the above analysis, perhaps it is wise to look again at the chart of the Portuguese 10 year yield again. The sustained selling over the last year reflects a trend, rather than panic or vigilante short-selling.

The drop in foreign ownership of EU periphery bonds is very alarming. The Irish bailout was necessitated due to a solvency crisis in Irish banks because they had jumped in to buy Irish bonds in 2009 and 2010 as foreign demand dropped. It is no accident that there was no haircut for bond holders of Irish debt, the bailout was designed to aid bondholders as much as the sovereign. It is for this reason that I am most concerned for Spain and Portugal and, conversely, it is why so many people are complacent on the issue. Sure, Spain and Portugal have onerous deficits and gross debt levels, but the real problem is the solvency of the banks. In the case of Spain, all those unlisted Cajas and parastatal institutions may well be a ticking time-bomb. These investors already have the enormous weight of private sector bad debt on their books, the last thing they need is a sovereign bond crisis.

The converse - as was the case for Ireland - is that governments are effectively tied to the fortunes of their banks. You can see the effect of the drop in foreign demand for periphery debt in the below chart — from Citigroup’s economics team — and made using the World-Bank Joint External Debt Database (H/T FT):


As a way to conclude, here is Simon Johnson at his very best:

And one more thing. This from Standard & Poors last night: they are placing Greece on negative watch.

* We are assessing the credit implications of the proposed European Stability Mechanism (ESM) that may govern EU sovereign bonds beginning in July 2013.

* Specifically, we believe that assigning “preferred creditor” status to future official lending via the ESM could be detrimental to the ability of non-official holders of sovereign debt to be repaid.

* Since the details of the plan are still emerging, we are placing our ‘BB+’ long-term sovereign credit rating on Greece on CreditWatch with negative implications.

* The negative CreditWatch placement reflects our belief that Greece might be a future recipient of ESM funding.

* We are assessing the credit implications of the proposed European Stability Mechanism (ESM) that may govern EU sovereign bonds beginning in July 2013.

* Specifically, we believe that assigning “preferred creditor” status to future official lending via the ESM could be detrimental to the ability of non-official holders of sovereign debt to be repaid.

* Since the details of the plan are still emerging, we are placing our ‘BB+’ long-term sovereign credit rating on Greece on CreditWatch with negative implications.

* The negative CreditWatch placement reflects our belief that Greece might be a future recipient of ESM funding.

On Nov. 28, 2010, the European Council endorsed, in principle, the permanent institutional set-up for European Monetary Union (EMU) sovereign borrowing that is to follow the closure of the European Financial Stability Facility (EFSF; AAA/Stable/–) in June 2013. We have identified what we consider to be two key differences between the ESM and the EFSF:

* A key difference between the current EFSF and the contemplated ESM lies in the apparent ability of the ESM’s sovereign shareholders to trigger a debt restructuring on a case-by-case basis. We understand that this restructuring would potentially include private bondholders holding bonds issued by those EMU sovereigns declared insolvent (based on the application of as yet undisclosed criteria or procedures). We believe that the multilateral political prerogative to trigger private debt restructuring could be subject to political rather than objective financial considerations. We also believe that it is possible that European policymakers might, in the midst of a future crisis, make uncoordinated and even contradictory statements, potentially causing market distortions and jeopardizing funding access of individual sovereigns.

* Notably, the public statement by the Eurogroup finance ministers envisions that any post-2013 lending by the ESM will benefit from “preferred creditor” status, effectively subordinating non-official holders of sovereign debt to the ESM. We believe that such subordination could hurt the prospects of timely and full repayment of non-ESM sovereign debt and would likely lower recoveries on such non-ESM sovereign debt.

A great weekend to all.

The Right To Know

How much ownership over information can citizens in democracies claim? We are constantly being told that certain information is kept from us for the national good, in the interests of "national security" or to protect the stability of the economy. Sometimes, in the case of Australia's National Broadband Network, we are told nothing and for no good reason. The point is that we will get nothing until we demand it, and the way is generally through momentum that inevitably shows up in the polls. Wikileaks has changed this, and we again have the democratization of information even if it was obtained by illegal means by the original leak.

The Economist has a stirring defense of Wikileaks:

To get at the value of WikiLeaks, I think it's important to distinguish between the government—the temporary, elected authors of national policy—and the state—the permanent bureaucratic and military apparatus superficially but not fully controlled by the reigning government. The careerists scattered about the world in America's intelligence agencies, military, and consular offices largely operate behind a veil of secrecy executing policy which is itself largely secret. American citizens mostly have no idea what they are doing, or whether what they are doing is working out well. The actually-existing structure and strategy of the American empire remains a near-total mystery to those who foot the bill and whose children fight its wars. And that is the way the elite of America's unelected permanent state, perhaps the most powerful class of people on Earth, like it.

As Scott Shane, the New York Times' national security reporter, puts it: "American taxpayers, American citizens pay for all these diplomatic operations overseas and you know, it is not a bad thing when Americans actually have a better understanding of those negotiations".

...Some folks ask, "Who elected Julian Assange?" The answer is nobody did, which is, ironically, why WikiLeaks is able to improve the quality of our democracy. Of course, those jealously protective of the privileges of unaccountable state power will tell us that people will die if we can read their email, but so what? Different people, maybe more people, will die if we can't.

The recent Fed data dump signals, perhaps, a turn in the official policy of governments that democracy has its limits in the proliferation of sensitive information. FT Alphaville has an excellent post that serves as a primer to the huge volume of information. The $3 trillion or so in emergency aid was doled out to all and sundry, including foreign banks, numerous central banks, and even non-financial companies.

Felix Salmon over at Reuters has done an very good job at providing pertinent bits of information on a daily basis. Here is the latest and I've reposted the chart which is most illuminating:


The Fed's data led many to believe that it has now become to the central banker to the world and, along with Jean Claude-Trichet's press conference performance and the ECB's simultaneous bond buying, was enough to set off a rally in equities, EU periphery bonds and commodities in the last two days.

Well, the US will not be bailing out the redhead step-children of Europe. It's commitment is limited to the IMF, and whatever overnight swaps agreements remain in place. Certainly, Ben Bernanke would be roasting over a hot bed of coals stoked by Ron Paul if this was even suggested. Here is the Reuters report on the matter (H/T FT):

Dec 1 (Reuters) - The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.

"There are a lot of people talking about that. I think the European Commission has talked about that," said the U.S. official, commenting on enlarging the European stability fund. "It is up to the Europeans. We will certainly support using the IMF in these circumstances."

"There are obviously some severe market problems," said the official, speaking on condition of anonymity. "In May, it was Greece. This is Ireland and Portugal. If there is contagion that's a huge problem for the global economy."

While reluctant to dictate to Europe how it should address the unfolding debt crisis, the U.S. government is growing increasingly concerned about the global fallout of Europe's debt crisis. A U.S. Treasury envoy has been sent to Europe for talks.

The IMF, whose biggest single shareholder is the United States, has now contributed 250 billion euros or one third of the EFSF financial rescue mechanism.

We hold our breath for the next installment from Wikileaks, whether it is Bank of America, Goldman Sachs, or Morgan Stanley, it doesn't matter. The public do have a right to know if their future tax receipts are being pledged against the survival of what might be horribly corrupt organisations. Anger is brewing in Ireland over the preference for foreign bondholders over Irish taxpayers. Kevin O'Rourke highlights the danger that Europe faces in the face of severe austerity measures, debilitating long-term debt from bailouts, and the threat to retirement. Europe has always met crises with drastic political overhaul.

The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway....

Who knows what the political consequences of all of this will be? The southern Irish are a conservative lot... political change in normal times is slow; but when it does come, it may come in a rush....

[W]e are about to have a general election, and if Brussels thinks that this deal is not going to be the big issue in that election, then they are even more out of touch than we already think they are. It is no longer even certain that the budget will be passed in December. Brussels may not have a Plan B, but they had better prepare one nonetheless...

The balance between enlightenment, outrage, and social upheaval will be tested yet again.

More Euro

Standard & Poor's had more bad news for the periphery of Europe yesterday when they put Portugal on Watch Negative. Here is an excerpt (courtesy of the FT):

LONDON (Standard & Poor’s) Nov. 30, 2010–Standard & Poor’s Ratings Services today said it placed its ‘A-’ long-term and ‘A-2′ short-term foreign and local currency sovereign credit ratings on the Republic of Portugal on CreditWatch with negative implications. The transfer and convertibility assessment remains ‘AAA’.

“The CreditWatch placement reflects our view of increased risks to the government’s creditworthiness,” said Standard & Poor’s credit analyst Frank Gill. “These risks stem from uncertainty about the government’s possible recourse to official funding and the consequences that obtaining such funding could have for the position of private-sector creditors vis-?-vis official creditors after 2013.”

In 2011, Portugal’s minority government is set to implement an ambitious fiscal austerity program with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts. In particular, we believe that policies the government has pursued have done little to boost labor flexibility and productivity. As a consequence of the Portuguese economy’s structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms. The downward revision to our growth projection also reflects the fact that Portugal has not reduced its large external current account deficit during 2010.

In addition to what we view as the economy’s weak growth prospects, the large stock of Portuguese debt that non-residents hold (54% of GDP) has increased the government’s vulnerability to rising real interest rates. This contributes to the country’s large gross external financing needs and, we believe, raises the likelihood that Portugal will seek external assistance from the EU.

What Portugal does to combat downward pressures on growth and under what terms it accepts external support–if it does at all–will influence the government’s creditworthiness. The Eurogroup Ministers recently proposed treaty changes to establish a permanent crisis mechanism to be called the European Stability Mechanism (ESM), which will be based on the European Financial Stability Facility. It is our understanding that the ESM may be designed to rank ahead of private creditors in any future debt restructurings beginning in 2013. As a result, debt that European Monetary Union member states issue might not rank pari passu with debt that the ESM issues. We think that this treaty change would represent a move away from the original design of the European Financial Stability Facility, which was intentionally exempt from preferred creditor status by the 16 members of the Euro Area in an effort to assist European Monetary Union members in financial difficulties.

We expect to resolve the CreditWatch within the next three months. “If Portugal does seek an external support program and if we believe private creditors will be subordinated to public creditors, or if Portugal’s fiscal or growth prospects weaken further, we could lower the long- and short-term ratings,” said Mr. Gill. “Even if we were to downgrade Portugal, we would currently expect the ratings to remain in the investment-grade category.”

“If Portugal does not seek an external support program because of better-than-anticipated fiscal performance or the passage of growth-enhancing reforms, we would view the likelihood of it needing external official support as reduced,” said Mr. Gill. “As a result, we could affirm the ratings at ‘A-/A-2′.”

The following two charts prove that the bond vigilantes are alive and well. Here is the Spanish 10 year bond yield over the past year:


The crisis has escalated to such an extent that even Italy has been drawn in to the funding worries. Italy's yield on 10 year money:


Here is a cheat sheet courtesy of Nomura (please click to enlarge). On the face of it, Italy has a much meeker budget deficit at around 5% of GDP. Why the sell-off in Italian bonds?


Perhaps the answer lies in this next chart that examines cash flow from in bond coupons and redemptions over the next year.


James Hamilton at Econbrowser has a good treatment of the current state of the European sovereigns. Here is the key point that he makes:

...we're seeing last spring's sovereign debt concerns being replayed in slower motion but on a broader scale than the first time around. There's another interesting parallel with last spring's concerns. The developments in Europe have coincided with efforts by China to raise interest rates and tighten credit. And just as we saw last spring, the decline in China's stock market has been as big as that for European equities.

If this is deja vu all over again, what might we expect next? What happened last spring was a flight to the dollar as a seemingly safe refuge. And there's been some appreciation of the dollar with the latest events as well, with more to come if history repeats itself.

But this is a slower-moving and broader wave than the first one. And tsunamis pack much more power than a simple crashing breaker.

Here is Belgium, by the way...