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Eyes are on Europe

April 18, 2012 – 5:04 pm

Tuesday, Spain issued bonds and the sale went much better than anyone expected. They will have more to offer on Thursday. Our stock market reacted with a very strong rally after two weeks of softness. This certainly tells us that all eyes are still on the European problem.

Italy and Spain have had to deal with rising interest rates as they refinance their debt. This is an ongoing issue just as it is here in the U.S. The market determines the interest rates governments have to pay when they issue bonds. In the U.S. rates are very low and have been for some time. Part of the reason is that the FED is influencing rates strongly, but they do not control those rates.

Concerning Europe, the bond market has much less faith in their governments’ ability to repay their debt so interest rates have been rising, especially since the Greek bond holders had to take a 70% reduction on Greek bonds. Much of these EU bonds are held by banks so maybe the quality of the banks’ balance sheets are as good as reported.

These issues produce doubt and fear. Interest rates rise in this kind of environment. The ECB, IMF and European governments are trying to restore confidence by reducing spending but without economic growth how are they going to pay back the borrowed money? Thus the doubt.

This is a big problem that is not easily solved. So who is buying Spain’s debt? If it is not the banks it might be government buying government debt. How long can that last?

Good Trading
Steve Peasley

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