PIIGS, Ratings and the World Cup

I don't know if anyone else has noticed, but there seems to be somewhat bizarre correlation occurring with the World Cup and the real world, particularly with regard to a countries performance compared to their investment ratings. - This follows the disastrous spill by the English goalie 'Green' against the US, which echoed the disastrous spill by a British company with a 'green' logo against the US. -- Looking at the PIIGS countries' world cup so far brings home my point. Portugal, one of the pre-tournament favourites, struggled in a 0 -0 draw with Ivory Coast. Current World Champs Italy scraped a draw against mighty Paraguay. Ireland did not make the finals thanks to some handy work by the French, but former European champions Greece looked totally abject losing 2 -0 to South Korea. However, the big shocker was the defeat yesterday of hotly fancied current European champions Spain to Switzerland, a country with barely enough flatland for more than a couple of football pitches. Yet as Spanish government bonds spreads were once again sold heavily and spreads widened sharply, no doubt prompting fears of further downgrades, their football team was losing to the country with possibly the highest rated government bonds in the world. -- Meanwhile the top performers of the opening round of matches pretty well match the recent top performing countries bonds, Germany had the best result of the opening round, whilst the US and Japan, both countries where football (or soccer) rarely gets much attention, easily exceeded their expectations. And finally on a day when Chile looked very impressive in winning their first match, Moody's actually upgraded Chile to Aa3 from A1, 'you could not have made it up'.

Which brings me nicely onto the subject of Spain and Bond yields. Once again the spread of 10 year Spain has widened versus the German benchmark. already as I write this morning, they have widened 10bps on the day, and are now +42bps on the week. However, at the moment markets seem unphased with regard to this, and thus far equities and the Euro are onto holding strong gains made this week. I personally feel that this is like watching a Hurricane forming deep out to sea, which has the potential to be a full strength category 5 with heavy destructive capability should it touch land, however the way markets are behaving it seems they feel that it will probably never reach land. This suggests to me that either this hurricane will blow itself out, or there is too much confidence that its path will not veer onto a more dangerous course.

The chart below shows the widening of Spain v Germany and the divergence with the EURUSD fx rate over the past week.