Saturday, March 26, 2011

Why Euro Debt Matters More Than Oil Prices Or Chinese Inflation

by Steve Schaefer


March 25, 2011

Mike Mutti, Raymond James’ senior credit strategist, keeps a screen with five-year credit default swaps for European sovereign debt open at all times. That’s because more than any other current crisis facing the world – from the devastating earthquake in Japan to the turmoil in Libya and the Middle East – a severe escalation in Europe’s credit crisis has the capacity to cause a repeat of the 2008 meltdown.

Since the Greek debt crisis erupted nearly a year ago, new issues have cropped up in other peripheral countries (commonly, if not politically correctly, referred to as the PIIGS) every few months. You can almost set your watch to it. Though the disaster in Japan and spike in oil prices put the European debt issue on the backburner for a time, it flared up again this week after Portugal’s Parliament rejected an austerity plan, swiftly followed by downgrades to the country’s sovereign debt ratings.

Mutti acknowledges the challenges facing Portugal, Ireland and Greece, the three PIIGS in the most precarious shape, but believes the bailouts of those nations are essentially priced into the market. Fears crop up every few months, “then the fire is put out when European leaders put another hundred billion euros aside,” he says by way of explaining the ebb and flow in credit markets.


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