The widening of the Ted spread appears to have instigated, or at least preceded once again, exponentially more chaos in the European and Asian debt markets.
In Europe, the “Latin European” economies — Spain, France, Italy and Greece (coincidentally, the losers of the current euro arrangement) have seen tiny sovereign debt spreads over German bonds widen into a gaping maw. Belgian bonds have apparently been clocked as well, because of the country’s large and powerful secessionist movement, as well as an onerous national debt.
Yields on Italian 10-year bonds rocketed to 40 basis points over comparable German Bunds today as the flight to safety gathered pace. The spread had been stable at around the mid 20s for several years until this month.
The scramble to dump riskier bonds hit all the southern European countries, as well as Ireland and Slovenia.
While the markets have not begun to discount a possible break-up of the eurozone, they are clearly pricing in an ominous rift between the Latin and Germanic halves of the monetary system.
The spreads rose to 37 basis points (bp) for Greece, 18bp for Spain, and 14bp for France. Both France and Spain enjoyed spreads as low as 4bp until May, before the global credit bubble began to burst. Italy and Greece both have national debts above 100pc of GDP – far above the 60pc limit set by the Maastricht Treaty.
Asia has seen its own stampede to quality, too.
Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives.
“This is a severe warning sign,” said Hans Redeker, currency chief at BNP Paribas. “Asia ignored the credit crunch in August but now we’re seeing the poison beginning to paralyse the whole global economy,” he said.
Korean and Chinese three-month yields have fallen from 4pc to 1pc in a matter of days in a eerie replay of events on Wall Street in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to falls at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees.
Stateside, GM just announced that it has “no further obligation” to fund GMAC. Given GMAC’s shambolic accounting sheet, and even worse rumored losses, and the terrible credibility of GM–GMAC was originally walled off from GM to prevent a GM bankruptcy from destroying GMAC–I don’t see how that isn’t a bankruptcy warning. Another massive credit originator is headed for the dustbin.Regardless of what happens to GM, whoever made the call to dump 51 percent of GMAC onto Cerberus cut a brilliant deal–although GM’s survival is also in doubt, and its credit default swaps rose to 860bp after the announcement. Beyond the high-profile implosions at Citigroup, Northern Rock, and the other high-profile banks are private equity consortia which are also choking to death.