April 21, 2010

A Series Of Unfortunate Events For Europe

Europe has been plagued by a series of unfortunate events in recent months and as luck might have it, mother nature has now chimed in as well.  Last week’s volcano eruption in Iceland and the subsequent flight ban for large parts of Europe caused havoc among travelers and businesses.  It did not help the Euro either which was just about regaining a bit of strength on renewed news that support for Greece from Eurozone member countries would be forthcoming.

When the flight ban was finally lifted today, analysts were still debating the economic effects of the volcanic ash cloud and wondered whether the total cost of this calamity would be severe enough to derail the nascent recovery.  No rest for the wicket though and the focus of attention went right back to Greece where the yield on their 10-year government bonds rose above 8% on Wednesday. For the first time, Greek 10-year yields were more than 500 basis points above German Bunds.

To see how Greece got there, please consider the illustration below showing the yields on 10-year Greek Government Bonds as well as the movement of the Euro versus the US Dollar.  April appears to be a pivotal month thus far.  If unfortunate events were to continue and/or the sovereign debt crisis were to proliferate to other Mediterranean Eurozone countries, the blue and red lines below would spread apart even further...


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