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posted on 18 February 2016

EU PIIGS: Are These 10-Year Sovereign Bond Yields Either Warranted Or Sustainable?

by Michael Haltman

Summary: As the migrant crisis in Europe worsens serious steps to address it are being considered.

One proposal is for passports to be required in order to cross from one EU country to another.

Would such a drastic move spell the beginning of the end for the Eurozone as a viable entity?

And if so what will happen to the piles of sovereign debt that's been issued by the economically vulnerable EU PIIGS, and to the investors who have been pouring money into them at what appear to be ridiculously low yields?

'EU PIIGS: Are These 10-Year Sovereign Bond Yields Either Warranted Or Sustainable?'

A funny thing happened on the way to global investors reach for return and, one would assume, desire for preservation of capital!

I speak of EU sovereign debt and the severe contraction in the level of yield demanded by investors for the bonds of what had at one time (and actually still are) been affectionately referred to as the EU PIIGS.

The acronym PIIGS stands for those countries, Portugal, Ireland, Italy, Greece and Spain, who once upon a time had been considered candidates for potential debt default (depending of course on what your definition of a bond default is).

piigs.vs.us.debt.2012.2014.2016

The marked improvement in the yield levels of these once toxic credits has been due in part to European Central Bank (ECB) support, some limited improvement in their economic fortunes and of course the hunger for returns that has forced a great many investors to move far further out onto the risk spectrum than their risk tolerance would otherwise suggest that they should be.

What Brings Me To Consider EU PIIGS Today?

The refugee crisis that has overtaken the EU (Schengen Area) has now forced these countries to consider potentially turning their backs on one of the key tenets that made the European Union what it is. I speak of the open borders between countries that require no passport to traverse.

If the 2-year passport plan being considered was actually to be implemented it would, as we have seen with temporary tax hikes in the United States, likely be hard to reverse.

If this is the case, could this possibly spell the beginning of the end of the Eurozone?

And if that is the case what might happen to the ECB and its tacit support for the debt of countries that should likely not be trading at the yield levels they currently are?

So many questions, and so few answers! Stay tuned!


Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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