Gold – the only winner as the Euro struggles from crisis to crisis
As the euro struggles from crisis to crisis, it isn’t hard to identify the losers.
Peripheral country bonds have been hammered. Equities have struggled to make any progress all year. The main euro-zone banks have had to make huge write-downs on their holdings of Greek debt and have seen their shares collapse in value as a result. The euro itself has started to fall in value against other currencies, and almost certainly has a lot further to go.
But where are the winners? After all, all that money has to go somewhere.
German bonds have been the most obvious beneficiary of the turmoil. The yield on the 10-year German bond had fallen all the way down to 1.7%, an all-time low. Back in April this year it was yielding more than 3.5%. In 2008 it was above 4.5%. Clearly, money has moved out of the peripheral euro-zone countries, and been parked in Germany because investors see it as the one safe haven on the continent.
But how safe is Germany really? Its own debt-to-GDP ratios don’t look that great. According to the latest Eurostat statistics, German debt is now 83.2% of GDP, up from 65% of GDP in 2007. That is higher than France — 82.3%, since you ask — and Spain as well. Spanish debts total a fairly modest 65% of GDP. If France and Spain are getting hit by the markets, then why not Germany as well? It isn’t a safe haven from anything.
The U.K. has collected some of the money fleeing the euro-zone. British government bonds, known as gilts, have dropped to record lows as well. The 10-year bond now yields just 2.1%, the lowest rate since paper of that duration was first introduced in the 1950s. The U.K. is seen as a relative safe haven, yet still offers investors some exposure to Europe.
But the country has terrible debt problems of its own, and a flagging currency. The U.K.’s budget deficit amounts to a colossal 10.4% of gross domestic product this year. That is roughly the same as Greece, more than Spain and Portugal and a lot more than Italy. The pound could easily fall further. Making the U.K. your safe haven makes as much sense as escaping from a burning building by throwing yourself off a cliff.
A lot of European money has decamped for Switzerland, always the first refuge in times of trouble. But the Swiss are manipulating their currency to stop it rising too fast. They can carry on doing that for as long as they like.
A lot of money, understandably enough, is fleeing to the emerging markets. Plenty of developing-world bond markets look a better bet over the medium term than anything in the troubled euro zone. Charles Robertson, chief economist at the investment bank Renaissance Capital, noted in recent report that borrowing by emerging-markets banks, companies and governments was running at close to record levels. “We have never seen such a huge ability to borrow by the emerging market world via eurobonds,” he argued.
There is a limit to how much cash can go into those countries, however. Italy and France are two of the four largest debt markets in the world — money fleeing Europe can’t all descend on Poland or Indonesia without creating a huge and dangerous bubble in those markets.
In reality, the only big winner from the euro crisis will be gold.
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