Germany

The Euro is Already Gone

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Today I read an article about the fact that the German government can issue debt with a negative yield.

Germany sold six-month treasury bills at a negative yield for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region. The government auctioned 3.9 billion euros ($4.98 billion) of securities maturing in July at an average yield of minus 0.0122 percent, the Federal Finance Agency said in an e-mailed statement today. It was the first time it sold the securities at a negative yield, Joerg Mueller, a spokesman in Frankfurt, said in a telephone interview. The Netherlands sold 107-day bills at minus 0.007 percent on Dec. 12.

Thus purchasers are paying the German (and Dutch) governments for the privilege of lending them money.

Meanwhile, Italy is having a tough time finding buyers for its bonds. In order to sell debt, the yield is now above 7%, a line that (for some reason) in the popular press is read as the dividing line for “unsustainable”, kind of like the “Mendoza line” for baseball batting averages.

Italian bond yields rose above 7% on Friday (Dec 23) as worries about the government’s debt problems resurfaced. The yield on 10-year Italian government bonds edged up to 7.04%, after falling below 6% earlier this month. Italian yields first topped 7% in November amid fears that Italy could fall victim to the same debt crisis that led to bailouts for Greece, Ireland and Portugal.

On the face of it, this seems odd. Germany and the Netherlands are issuing bonds in Euros, just like the Greeks, Italians, Ireland and Portugal. Theoretically, all of these countries have the same “backstops” built into the Euro, and there is no exit mechanism.

The debt market is saying something different than what the politicians are saying – the debt market doesn’t believe the hype and, when the dust settles, they want to be holding paper from the creditworthy countries (Germany and the Netherlands) and not the PIIGS (the above countries plus Spain).

Back when Dan and I were in college we had a friend nicknamed “Strohs”. Since we were all very poor back then when we played poker often people used “markers” instead of cash. At the end of the game (generally when we ran out of beer and / or someone passed out) you might hold cash or you might hold “markers” which were really IOU’s from each person at the game. “Strohs” markers were a deck of cards marked with the ubiquitous “Dogs playing poker” picture, and thus at the end of the game if you held his marker, they were “Dogs”. “Strohs”, while a good friend of ours, wasn’t an especially credit-worthy guy (at the time). He earned his nickname by showing up for college with some clothes in a hefty trash bag and a pallet of Strohs 30 packs with which he filled his entire closet top to bottom.

So as the night wore on, if you held “Dogs” in your pile of chips and markers, your betting became especially reckless. It was common to say “I’ll raise you a bucket of dogs” which probably meant you were bluffing because if you lost all you did was remove the markers with which payment was unlikely to happen out of your stack of chips, for the promise of winning “real” markers (equivalent to the German debt above) or actual cash, instead.

For years books and magazines have focused on “yield” and also the credit worthiness of individual companies and (mostly) ignored currency risk. A friend of mine in the investment business talked about a customer who bought a huge Australian debt position and their piddly yield was irrelevant as currency gains from the Australian dollar (which I wrote about here) drove the position to a huge gain, when translated back into (weak) US dollars. Obviously this trader was ignoring yield and betting on currencies.

This is what appears to be happening today. When Europe’s dust cloud settles, people don’t want to be holding “a bucket of dogs” backed by promises from PIIGS governments’, they want the equivalent of the old Deutschmark from Germany. That is why they are essentially ignoring yield and accepting a negative yield from one country and demanding a 7% yield from another country ostensibly backed from the same currency.

Cross posted at LITGM

Christopher Hitchens, 1949-2011

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Here is a quote of the day, as an ave atque vale to a contentious, smart, learned, moralistic, opinionated and unique man of letters.

My father, a Royal Navy commander, was on board H.M.S. Jamaica when it helped to deal the coup de grâce to the Nazi warship Scharnhorst on December 26, 1943–a more solid day’s work than any I have ever done.

From Benjamin Schwarz’s eulogy, which is very good. Hitchens’ essays for the Atlantic were always worth reading.

Hitchens had a good understanding of the concept of the Anglosphere:

[P]roperly circumscribed, the idea of an “Anglosphere” can constitute something meaningful. We should not commit the mistake of “thinking with the blood,” as D. H. Lawrence once put it, however, but instead emphasize a certain shared tradition, capacious enough to include a variety of peoples and ethnicities and expressed in a language—perhaps here I do betray a bias—uniquely hostile to euphemisms for tyranny. In his postwar essay “Towards European Unity,” George Orwell raised the possibility that the ideas of democracy and liberty might face extinction in a world polarized between superpowers but that they also might hope to survive in some form in “the English-speaking parts of it.” English is, of course, the language of the English and American revolutions, whose ideas and values continue to live after those of more recent revolutions have been discredited and died.

That is from his essay An Anglosphere Future. It is very much worth reading, or re-reading.

As a Catholic I regret Hitchens’ typically violent animosity against my religion and Christianity in general. He was usually unfair in this regard. But Hitchens was a slugger, who picked his enemies and went after them, and he was not interested in fighting fair, he was interested in winning. So be it. I ask the God he did not believe in to grant him abundantly the mercy we all rely on, and to impose only the gentlest of Divine admonishments upon this talented and tumultuous son of His. Judge not lest ye be judged, and I will be the last to judge Mr. Hitchens or anyone else in the court reserved for the Divine judge. Hitchens’ fellow English man of letters, and fellow literary debater, dirty fighter and hard-puncher, St. Thomas More, at the end, when the death sentence had been handed down, told the men who had unjustly condemned him that he hoped one day they would all be merry together in Heaven. I hope the same for Hitchens, and for Orwell — Hitchens’ literary hero and mine — and for many others. May that day be far off for many of us. But for Hitchens it is now.

Rest in peace.

Norway and Germany

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I recently traveled to Norway and as a minor military historian was fascinated by their historical entanglement with Germany. I was not able to travel to see the coastal fortifications in the Northern part of the country that I wrote about here.

Balestrand and The Kaiser

Balestrand is a beautiful little community along a large fjord (Sogenfjord)in Norway. While we were there I stayed at the Hotel Kviknes, which has a long tradition as a fine tourist hotel.

The Kaiser brought a portion of his fleet up the fjord with him while he visited Norway as a tourist. I saw a photo from a local guide but I can’t seem to find one on the internet. He had a touring vessel and it looked like a couple of light cruisers but am not certain.

This is the chair in the Hotel Kviknes where the Kaiser supposedly sat when WW1 was declared. There was a young couple having a drink at the table and they were nice enough to let me get a photo of the bottom of the chair which was marked accordingly.

Stalheim Hotel and the Kaiser

The Stalheim Hotel is one of the most famous hotels in Norway, known for its fabulous views as you can see below.

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68F on November 13, 2011

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The Location: The front porch, Oak Park.

The Drink: Bourbon and ginger ale.

The Book: Twenty Million Tons Under the Sea: The Daring Capture of the U-505, by Daniel V. Gallery. A pal, a former destroyer officer as it happens, gave me this book with the highest possible recommendation. Rear Admiral Gallery was a salty character. He gives excellent and colorful and opinionated explanations of all aspects of the war against the U-Boats, with many anecdotes. A most educational read, and a page-turner. As of page 130/338 I can recommend it to all who are interested in such matters. If you visit Chicago, you can see the U-505 at its permanent berth at the Museum of Science and Industry, where it came to rest after Gallery’s men captured it.

We won’t get many more nice days like this one this year. Today is pretty much an aberration. I am expecting a severely cold winter this year, based on pure guesswork and gut feel, speculation about sunspot activity and its effect, contrarianism about global warning, general pessimism, and not much else.

(Below the fold, Gallery on the conning tower of the captured U-505, via Wikipedia.)

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