EU sovereign debt: Is it really different this time?

Or will it be another one of history’s examples of bulls and bears making money and of PIIGS being slaughtered?

In other words is the liquidity angst being felt at one of Portugal’s largest banks an isolated event or a sign that trouble may loom on the horizon for the EU as a whole?

That was then…

It was about four or so months ago when the precipitous drop in post-financial crisis Eurozone sovereign debt yields, particularly for some of the economically weaker countries, caught our attention.

In large part the price rally/yield decline seemed to us spurred by institutions chasing yield under an assumption that the overall European economy might be improving and that EU sovereign debt would be backstopped by the whole of the EU and therefore be safer than the yields available at the time indicated.

This feeling seemed to be particularly true when it came to the debt of the EU PIIGS (Portugal, Ireland, Italy, Greece and Spain).

On April 11, 2014 these were the 10-year yields for some of the worlds sovereign debt:

United States:   2.69%
Italy:                     3.26
Spain:                    3.21
Greece:                 5.91
Portugal:              3.91 (after this article yields traded down to 3.33% on June18, 2014 and up to 4% today)
Ireland:                 2.95

This compared to May 18, 2012 yields of:

United States: 1.77%
Portugal: >10%
Spain: 6.29%
Italy: 5.83%
Greece: 28.92%
Ireland: 6%

Note the tight spread in April between what is generally considered risk-free paper in US government bonds and the debt of countries that only two years earlier was considered to be extremely high risk. As an example less than 30 basis points separated the yields of the United States and Ireland.

In the April article we asked the following:

‘Why the vast improvement in spreads to US government debt that in the case of Ireland is less than 30 basis points and, more importantly, is is sustainable?

Certainly the ability for these countries that have had limited to no access to the capital markets for years to now have that outlet for raising cash is a huge step forward.

But, as this tongue-in-cheek April 4, 2014 quote from the website Zero Hedge posits, are these yield improvements merely smoke and mirrors or sustainable…

‘It seems there is a lesson here for all… push your unemployment rate to record highs, loan delinquencies to record highs, and depress your people to record high suicide rates… and voila… low cost of funding is guaranteed (surely there is a recipe here for Ukraine or Turkey or…

Oh, and you absolutely must have a central banker with a ‘promise pony’.

As we anxiously await the outcome of AQR (Europe’s Stress Test) we can only imagine the bloated balance sheets of European banks stuffed with the domestic bonds that the crisis has now created and made the entire banking-system-sovereign-stress relationship inseparable.’

Back to the future!

As we have witnessed countless times in the past the herd mentality of institutional investors and the phrase ‘this time it’s different’ have led the smart money, or the people who often believe that they are the most intelligent in any room that they are in, down the road to severe financial pain.

Unfortunately these investment gurus take the individual investors who believe and trust in them along for the ride.

So this time will it be different with today’s financial event in Portugal simply a one-off that will have no bearing or impact anywhere else?

Or is it a harbinger of rainclouds on the horizon?

Only time will tell!


Written by Michael Haltman, President of Hallmark Abstract Service, New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions specializing in the areas of New York City, Long Island and Westchester.

Remember that you have the right to choose your own title company (click here to learn more)!

If you have any questions you can reach Michael by email at

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