We Finally Saved the Eur- ... Oh, Nevermind

Every day feels like Groundhog Day in Europe. We wake up, and there's a new reason the euro is saved. We go to sleep, and it turns out not to be true. Last week it was the Spanish bank bailout that was supposed to save the euro. It didn't. This week it was the Greek election that was supposed to save the euro. It didn't.

Instead, Europe keeps inching towards doom. The three charts below show why.

The first chart from Bloomberg shows the yield on Spain's 2-year bonds over the past six months. While the benchmark 10-year bond -- which hit euro-era highs on Monday -- has attracted most of the headlines, these shorter duration bonds give us a better sense of how desperate things are. It's bad news all the way down the yield curve.

Spain2s-2.png

Who doesn't love the smell of insolvency in the morning? Although this isn't quite apocalypse now. Just later. Short-term borrowing costs were higher last November -- before the European Central Bank (ECB) ended the panic by throwing money at banks. But this is close enough. With 1-year borrowing costs surging past 5 percent on Tuesday, Spain could soon have trouble keeping itself afloat. 

Investors are taking their euros out of Spanish bonds and stuffing them into metaphorical mattresses instead. If only. Investors would actually be better off stuffing their euros into literal mattresses. In other words, earning nothing on their money. Because right now yields on ultra-safe haven debt is negative. Investors are paying some governments for the privilege of lending to them. 

The second chart, also from Bloomberg, shows the yield on Swiss 2-year bonds. Yes, that's a -0.3 percent yield.

Swiss2s-2.png

It's the same story with Danish 2-year bonds. Investors are "only" paying the Danish government 0.005 percent to lend to them, as this Bloomberg chart shows.

Denmark2s-2.png

What kind of upside-down world is this? Why would anyone every pay to lend money? Investors, as the old saying goes, are more worried about the return of, rather than the return on, their money right now. Neither Switzerland nor Denmark is a member of the common currency -- which means that if eurogeddon does comes, they're the closet thing the continent has to a safe port. 

But it's not even clear that paying money to lend to Switzerland or Denmark is a money-losing proposition. Say what? Both countries have undervalued currencies thanks to euro pegs right now. With so much capital pouring into their bonds, there is enormous upward pressure on the Swiss franc and Danish krone -- that their central banks are counteracting. But it's conceivable they could give up these pegs. Windfall gains could await their bondholders. (Read this wonderful story by James Mackintosh and Alice Ross of the Financial Times for more on how the Swiss National Bank is buying up euros to push down the Swiss franc, and using these euros to diversify out of German bonds and into Dutch bonds).

The same logic theoretically applies to German bonds. If the euro does completely crack up, German bonds might be redenominated from euros into more valuable marks. But investors would rather take their chances on Swiss or Danish debt, despite negative nominal yields. That's how scared they are that a bad euro ending will be bad for Germany too.

Europe is running out of time to write a new ending. Markets are getting tired of replaying the same day over and over and over again, even if Europe isn't. The longer they wait, the greater the chance of a result nobody wants.

So rise and shine, Eurocrats, and grab your financial bazookas, because yields are negative out there.
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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