In my April post “Have You Forgotten European Credit Default Swap“, I have shown you the chart of CDS in euro zone when many were talking about “the worst is behind us”. Now everybody has known how much the market crashed in May.
Let’s be “contrarian” again this time. In the past months, there are many talks about Eurobonds among the “investment professionals” which seems to be the only “magic pill” for this euro debt crisis. To me, if ever the situation can be mitigated, it cannot because of eurobonds, at least not in the currently proposed form.
What is Eurobond?
Imagine you have worked hard and saved a reasonable sum of money. You have lent $50,000 to one of your neighbors but found he is in fact a gambler and lost all the money in Casino. Your son wanted to start a business but was cheated by his friend, all the $100,000 you gave to him was gone. One of your niece borrowed money from you for “emergency usage” but in fact squandered all into branded bags.
Now all of the three people come to you and say, “We want to pay you back but the banks do not want to lend us money. We all run out of cash. Why don’t we form a company together and take some loans using your name since you have very good credit record with the bank, and we will use the money to pay you back.”
How brilliant! Will you do it?
Do you think the lenders will be so stupid that they do not know one day, these three people will eventually dry up all your money? Haven’t you realized your creditworthiness has been dragged down by the other three?
The same episode is happening in the crucial European Union summit now, Merkel is coming under mounting pressure to soften up Germany’s resistance to the issuing of the so-called eurobonds that would share debt responsibility among the 17 eurozone nations. Italy, Spain, and France are in favor of eurobonds.
Let’s just take a look at the 5 year bond CDS of these four countries: (CDBR1U5:IND Germany; CFRTR1U5:IND Francis; CITLY1U5:IND Italy; CSPA1U5:IND Spain)
A picture speaks a thousand words, no wonder Merkel says Europe would not share total debt liability “as long as I live”.