It has been 6 months since I showed in chart form here, sales the credit default swap spreads over 5 years for Germany, the UK and the PIIGS. Then I was arguing that the UK was absolutely not in danger of default and it seems that events have borne that out. Well clearly, for the other countries quite a lot has happened since then – just take a look at this;
So Greece – particularly, Ireland and Portugal are all considerably worse. The UK has tentatively improved its position vis a vis Germany and Spain because of the sheer scale of the country compared to the other minnows, is one still to keep a close eye on.
One city expert tells me that because the EU/IMF aid package is in place for Greece and on-hand for Ireland and Portugal, default is not yet on the cards. That certainly makes eminent sense. And yet, writing yesterday in Critical Reaction, Tim Congdon says in PIGS to the Slaughter? that the two key facts emerging are;
1. The PIGS’ banking systems have not – so far – been able to repay their ECB borrowings. If the banking systems are eventually unable to repay the loans, the ECB will suffer a loss.
2. The ECB has already incurred losses on the bonds it bought in May, because of the adverse yield movements already noticed.
These issues are bound to be raised by the five German professors who are testing the legality of the May support package for Greece at the German Constitutional Court. The losses that the ECB is now taking on its interventions to help the PIGS undoubtedly constitute a breach of the no bailout clause of the 1992 Maastricht Treaty. If words have any definite meaning, the German Constitutional Court must deem the ECB’s actions and the Greek rescue inconsistent with that treaty and therefore illegal. The Eurozone remains in great trouble.