Is the EMU failing?

Have the European governments waited too long to take decisive action in the PIIGS problem?  It would seem to be the case!  Despite the Euro 120 billion package announced Sunday the 2^nd of May, it seems that the credit markets don’t believe this will work, in Greece or elsewhere.

Above are the top five CDS price movments on Tuesday the 4th of May, between 10% and 19% movement in the price of insuring "Club Med" countries debt...

As other commentators have made clear recently, why are we bailing out investors who invested in a patently bad economy (Greece) for a few extra basis point of yield.  Why are we bailing our DB, SocGen and their friends?

Cheating a bit from my vow to discuss only Canadian events I want to talk about what is occurring in Europe:  It is a sense of outrage that forces me to make a statement here.  For years Greece has been screwing-up by massive overspending and tax evasion on a scale hard to imagine – now they have to pay the pipe!  This correction should and it will hurt, but there’s no way bond investors should be made whole, they too bear responsibilities here, especially since they were pros (which is maybe why they will get away with murder).   

I too would love to be a hedge fund (or a big European bank bond desk), having bought Greece debt at a discount from a pension fund (once Greece was downgraded they had too sell) and looking to make a killing by being paid out at par.  This is simply unacceptable.  The moral of the story:  As an investor (especially if you are a pro) you should buy the stinkiest bond in the world, and look for some schlep to make you whole.

Socialize the losses and Privatize the profits!

Now the Europeans are looking at a trillion Euro bail out for the rest of “Club Med”.  I can foresee one change soon; Germany is going to get downgraded by Moodys and S&P – that would actually be somewhat funny, the one guy in the room that acted responsibly is going to get hit with higher borrowing costs!  Serves them right for making an economic alliance of a bunch of douche bags!

The EMU was always going to fail; it was generally pre-ordained since there are no budget control devices (especially since France in ’02 broke the budget deficit limit – with no consequences).  

As a side note the direct impact of failure of the EMU would be limited – there is always contagions risk, furthermore the failure of the EMU will create a dramatic economic dislocation in Europe which is certain to have repercussions on the price of commodities…Europe is Canada’s 5^th largest trade partner (less than 4%).