So, on Thursday morning Spain's cost of borrowing was substantially reduced in the face of suddenly strong demand for its sovereign debt, but by Friday evening S&P saw fit to downgrade it a full two notches. The luck of the Spanish?
I wonder what the result of that auction would have been had it been held on Saturday morning instead of Thursday morning… Even more curiously, Italy conducted an auction of its sovereign debt on Friday morning, within a few hours of the S&P announcement, which also went quite well — all things considered. It sold about 4.8 billion euros' worth of bonds and found at least decent demand, with rates dropping about 15% as compared to the results of its last sale.
All of this occurred at the tail end of a week that had seen the euro climbing in value against the dollar. Clearly, the EU had had a pretty good week until the S&P catcall. But most strangely, the announcement of the results of the Italian auction were delayed inexplicably, a fact that was generally overlooked in most of the reporting of the auction results. Perhaps the delay was merely the result of an overlong espresso and biscotti break, perhaps not– curiouser and curiouser.
The European debt crisis is now two years old, and a double dip recession seems very likely since no real progress has been made in resolving that crisis, as S&P very correctly pointed out in the report that accompanied its new ratings. A default by one or more members of the EU, or even just another recession, could have a quite nasty ripple effect throughout the world — particularly in the US which is a major trading partner of the EU countries, and whose banking system is intertwined with all of the central banks and financial institutions that would be severely damaged by such events. Many observers believe that the EU, at least in the form that in which it has existed for some time now, would not survive a real meltdown. Given the fact that pretty much all markets in all countries seem to be more and more vulnerable to psychological factors, I suppose it is in the best interests of all governments around the world to manage information so as to minimize mayhem and fear, irrespective of what actually happens in the coming months.
After all, what really goes on in Area 51 makes no difference to our daily lives, unless and until there is an actual alien invasion, right?
So the balanced seesaw of news that has characterized all of the financial events in Europe lately will probably continue until the crisis blows up or blows over. It really is all about timing; one does not need too much imagination to speculate that the Italian and Spanish debt auctions went well BECAUSE THEY HAD TO GO WELL, given the fact that everyone knew that S&P downgrade was likely imminent. If those auctions had produced a disastrous result, there would have been an awful lot of unsettling bad news in a very short time.
Aside from the fact that I love espresso and biscotti, I really wish I could have been present at whatever conversation caused the delay in the announcement of the Italian auction results. Whatever else is true, right now, Europeans are trying to buy a stairway to heaven by buying time–and it makes me wonder…
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.