With fears of sovereign debt defaults in the so-called ‘PIIGS’ nations hogging all of the headlines for the past two months the failure of economic powerhouse Germany to hold a successful treasury bond auction ratcheted up those fears even higher. If Europe is not at the financial equivalent of Defcon 1 yet one has to wonder what it will take for that to occur.
The auction, where nearly half of 6 billion euros worth of German bonds could not find buyers, was described by one analyst as a “complete and utter disaster.” After the auction ended the Euro fell below $1.34 and ten-year yields on German debt rose to 2.056%.
This news came on the heels of the news out of Belgium that the French are being asked to pay more towards the $120 billion rescue package for failed bank Dexia, jointly owned by Belgium and France which already had capital flying out of the Eurozone into the relative safety of the U.S. Dollar.
In turn, these events put extreme pressure on the U.S. Banks with the greatest exposure to French debt. 5 year CDS spreads for Bank of America (NYSE: BAC) soared to a record price or 479 basis points while the stock flirted with its October 4th low to close at $5.14. Unlike October 4th where the S&P 500, led by the financials, staged a momentous late-day rally which carried the markets for the next two weeks, there was instead what could only be thought of as a ‘flash-crash’ as high volume selling overwhelmed the markets in the final five minutes of trading sinking the index.
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