I’m wrong, but only for now

It turned out the markets didn’t have an awful day.  Italian bond yields are actually markedly down. So I was wrong about markets being ugly as a result of the ill-conceived plans for the Euro Zone.

Call me stubborn perhaps, but I firmly believe the agreement is an awful one.  It doesn’t address the primary problems of the Euro Zone, doesn’t restore competitiveness to Southern countries, doesn’t address the problem of a lack of a true, unlimited lender of last resort and most importantly, probably won’t get ratified by the populations of the individual countries.

I may have read the markets incorrectly for today, but I am as convinced as ever that the problems have not been solved.  Watch this space, there is more trouble ahead. (Felix Salmon, amongst others, feels similarly.)

Prediction: Italian bond yields will be above 8% at some point before the end of 2012 or at least one country will have left the Euro.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

Join the conversation


  1. Where does the “true, unlimited lender of last resort” get their money from ?

    1. They create it. No, don’t start shouting about hyperinflation just yet. In situations like this a little inflation is exactly what is needed anyway. So although the US has some problems of its own, having its own currency with real control and a real fiscal union, that’s why their bond yields are super-low and, political silliness aside, nobody is worried about the US defaulting.

  2. Is it not possible that the inflation will cause the default of Euro countries anyway ?

      1. Inflation can get up and away very quickly and the only tool left to control it, raising interest rates, is out of the question.

        1. The Euro zone is now more worried about deflation than inflation. took them a little while figure this out – why they raised interest rates last year is a mystery to me. But the real point is that inflation still won’t give rise to default. Greef sits borrowing at 29pc at the moment, not because of inflation but from fears of default. Inflation will decrease the chance of default and way more than offset a few percent in higher borrowing costs from inflation.

          1. The answer is that we have both deflation and inflation at the same time. eg real estate plunge in the US but heavy living expense increases. Same here in SA. Stagflation ?

            Europe, US, Japan, South Africa; its all a confidence game isn’t it ? Once the confidence goes, all bets are off.

          2. Property price declines are not part of consumer prices and so don’t imply deflation. Declines in rents would contribute to deflation.

            I don’t really think it is all a confidence game, although the is of multiple equilibria with government bond yields is interesting n related to confidence I suppose. Thanks for he continued comments.

Leave a comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.