Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this “debt deal” is really just a “managed” Greek debt default. Let’s be honest – this deal is not going to solve anything. All it does is buy Greece a few months. Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely. Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on. Bond yields are going to go through the roof and investors are going to start to panic. The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing. Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe.
The big message that Europe is sending to investors is that when individual nations get into debt trouble they will be allowed to default and investors will be forced to take huge haircuts.
As this reality starts to dawn on investors, they are going to start demanding much higher returns on European bonds.
In fact, we are already starting to see this happen.
The yield on two year Spanish bonds increased by more than 6 percent today.