British Lieutenant-General Frederick Browning, deputy commander of the First Allied Airborne Army to Field Marshal Bernard Montgomery
Our title follows up on our previous conversation "All Quiet on the Western Front", where we discussed our BIG reservations relating to the unachievable Spanish deficit target of 3% in 2013. This week's analogy refers to the overly ambitious Operation Market Garden of September 1944 in relation to the overly ambitious deficit targets set up by European leaders for Spain. It wasn't really a surprise to see Italy today following the footsteps of Spain and revising its budget deficit target for 2013 from 0.1% to 0.5%. They have as well revised their 2012 GDP contraction from 0.5% to 1.2% with a GDP growth target of 0.5% for 2013. Oh well...Initially, Operation Market Garden was marginally successful and several bridges between Eindhoven and Nijmegen were captured. However, General Horrocks' XXX Corps ground force's advance was delayed by the demolition of a bridge over the Wilhelmina Canal, as well as an extremely overstretched supply line (ESM and EFSF firepower are overstretched as far as Spain and Italy are concerned)...a bridge too far, and certainly a deficit target too for Spain, but here we go, we ramble again. Before we revisit the overly ambitious plan for Spain, and review France as the new barometer of Euro Risk with the upcoming first round of the presidential elections, it is time for our usual credit market overview.
The Credit Indices Itraxx overview - Source Bloomberg:
Itraxx Crossover has been rising and Eurostoxx Volatility is rising to 23.45 - source Bloomberg:
The "Flight to quality" picture as indicated by Germany's 10 year Government bond yields (well below 2% yield) is still pointing towards the lowest level reached in 2011, around 1.73% - source Bloomberg:
The current European bond picture with the recent rise in Spanish and Italian yields - source Bloomberg:
Given recent developments in revised deficit target objectives for both Italy and Spain, as well as the significant widening in credit spreads (Itraxx Financial Senior index indicating a rise in financial risk) and tightening of "safe haven" German bund, we would advise caution. In fact we have seen this movie before, so clearly "Mind the Gap" - source Bloomberg: