We have observed world credit markets for over 25 years; rarely have we witnessed an event so stunning as we did this week - world investors in a sudden rush to throw Germany’s debt to the wolves.
We recently recommended to short US debt to the German equivalent, this based on our view of relative fundamentals. That part worked fine, but our colleagues in London warned us there was something else. Something else indeed. Our Chinese friends and the rest decided to lift anchor and pitch Germany in with the rest. It is not surprising then that this week the biggest percentage increase in insurance cost for default, was for German debt!
What our colleagues sensed, and we did not is that investors would look to the Germany after fiscal union, or to the Germany after a break up. Reuters, “The first outcome would imply higher borrowing costs for Germany while the second would saddle Germany with a new national currency that would appreciate so sharply that it would cripple exporters and therefore the economy.”
Never too old to learn.
Robert Craven
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