Fisher Investments Editorial Staff
Others

The Piggy Bank’s Still Intact

By, 01/11/2011

Story Highlights:

  • The PIIGS have been able to fulfill cash needs via sovereign debt auctions, but at higher yields.
  • With pressure on Portugal to accept aid, investors are likely to watch Wednesday's sovereign debt auction closely.
  • It wouldn't surprise us if another country asks for aid—but that's what it's there for.
  • Overall, euro worries may make for euro underperformance looking ahead—but it remains unlikely they'll cause a bear in 2011.

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It's a new year for sovereign cash-raising, and unsurprisingly, euro scrutiny is again heating up. Sovereign debt auctions are scheduled this week for Portugal, Spain, and Italy—and with Portugal reportedly facing pressure to accept aid, Wednesday's auction is likely to garner attention.

The PIIGS (minus bailout recipients Greece and Ireland) have lately been able to fulfill cash needs at auction, but at higher yields nearly across the board. With 2010 funding out of the way, recent debt sales have been relatively small and higher rates less impactful. But in the coming weeks and months, auctions are likely to get larger as countries ramp up for 2011 funding, and higher rates could therefore have more of an impact—even equating to an increasingly unsustainable debt burden for some countries. In fact, there's no reason to believe more governments won't ask for aid—but remember, that's exactly what it's there for. And with Ireland the only taker so far (Greece's bailout was separate), the piggy bank is still largely intact.

Euro worries could continue contributing to volatile markets this year. But it wouldn't surprise us to see markets less and less shocked by subsequent rescues. Equity markets bobbled a bit on Ireland but entered a full-blown correction on Greece. Why? Partly, because it's old news, partly because the plan, money, and politics are out of the way. A Spanish bailout could cause more market havoc than a Portuguese one—Spain is a far bigger economy—but a Spanish bailout is also less likely at the moment. That could change. But, if it comes to that, even Spain is covered by the bailout fund. (Only Italy's wouldn't be fully covered by current funding, but Italy is the most fiscally sound of the little PIIGS.)

Perhaps most importantly, political will remains firmly committed to doing whatever's necessary to avoid a disorderly euro collapse. If the rescue fund is suddenly facing exhaustion, we wouldn't be surprised to see politicians approve an expanded bailout mechanism. Overall, euro worries may make for euro underperformance looking ahead—but it remains unlikely they'll cause a bear in 2011.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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