There is a lot of skepticism about high interest rates in Spain, Italy and high European bond rates in general these days. The problem is that the Euro debt crisis is far from over. Bond investors are requiring higher and higher interest rates to continue to invest in European junk bonds . The recent rescue of Spanish banks did not go off very well and stocks responded in Europe and North America by heading down. The much ballyhooed domino effect, starting with Greece and moving across Southern Europe, seems to be happening. High European bond rates stem from the stock market crash in 2008 and concomitant real estate crash in many markets. The disappearance of large amounts of equity has devastated credit markets and nations have been pouring economic stimulus after economic stimulus in an effort to get things back on track. The decision this last year in Europe to demand greater fiscal austerity of governments looked good on the surface but has led to increasing unemployment across the board.
Using the popular “Blood in the Streets” analogy, is it time to invest in Europe? How about taking advantage of high European bond rates? It comes down to the degree to which the main players in the Euro Zone, Germany and France, will be willing to share the risk. Currently these nations are putting money into a pool to help bail out their less solvent partners in the EU. However, there is talk of Euro bonds instead of bonds from individual European nations. High European bond rates would certainly fall if German credit were mixed with that of less prosperous nations. If that were the case those who currently invested today and took advantage of high European bond rates would reap a windfall. On the other hand, if the relief funds dry up those holding Italian, Spanish, and Greek bonds could well see their capital disappear. A huge part of the fundamental analysis necessary to get into such investments has to do with the uncertainty of the ongoing debt dilemma.
European Growth or Decline
It has become clear to many that strict fiscal austerity alone is not going to get the Euro Zone out of its debt dilemma. People need to work to eat and work to pay taxes. The high unemployment and general uncertainty in Europe has caused changes of government in France and a runoff election in Greece bringing about the possibility again of a Greek financial collapse . The strict fiscal requirements that have come with multiple bailouts are driving the Euro Zone economy into recession this year. Actually, nations like Greece have never come out of the recession that started in 2008. Add high European bond rates required by uncertain equity markets and you have a recipe for slow or non-existent economic growth, more difficulty paying debts, continual bailouts financed by printed money, and a steadily devalued Euro. The survival of the Euro Zone in all of its current parts may well be possible at the cost of greatly devalued Euro. Then anyone who wishes to invest in high European bond rates will need to take the falling Euro into their long term calculations.