Europe credit markets imploding! Why it matters to everyone !

In this financial market, it’s easier than ever to be confused. I say that because Wall Street pundits and European technocrats keep telling you that “All is well.”

They keep saying that stocks have to rise because it’s the end of the year.

They keep saying they have the sovereign debt crisis licked.

They keep announcing bailout plan after plan after plan, promising that this time, it will really work.

And frankly, what would you expect them to say? They need YOUR money to pay THEIR salaries and bonuses!

Well I don’t have those conflicts. So I’m going to give you the plain, unvarnished truth: Things aren’t getting better. They’re getting much, much worse … and it’s only a matter of time before the unfolding crisis in the CREDIT market spills over in a major way to the STOCK market! Or in other words, the sell off of the past couple of days could be just a sneak preview of a much worse meltdown to come!

Borrowing Costs Surging!
Bailouts Failing!

Sometimes a picture is worth a 1,000 words, so I’m going to let the charts do the talking. First is one showing the three-month euro-dollar, cross-currency basis swap (interest). Don’t let the fancy name fool you. This is simply a way to track how expensive it’s getting for private European banks to fund their dollar-based loans and investments.

As you can see, that cost is exploding to levels not seen since the worst days of the LAST phase of the credit crisis. The reason: Nobody wants to lend to European banks because they’re worried they won’t get paid back!

Next up is a chart of the yield on Belgium’s 10-year note. Yes, I said Belgium. You already know from my previous updates perhaps ? that the PIIGS countries — Portugal, Italy, Ireland, Greece, and Spain — are in dire serious trouble. They’re having to pay through the nose to borrow money, and their economies are stumbling as a result.

But now, the crisis is spreading to several other European countries you may not be aware of. As you can see, Belgium’s government note yields just hit a multi-month high of 4.88 percent. The cause: Concerns over the stability of its government (no real government since election last summer) and costs associated with its proposed bailout of mega-bank Dexia.

And it’s not just Belgium, either. Austria is one of the AAA-rated countries in the euro zone that’s supposed to help support its weaker brethren. But contagion selling is now spreading to that country’s debt market, driving the yield on its 10-year notes to double the yield level on comparable Germany notes!

Speaking of contagion selling, here’s the last chart. It shows the spread — or difference — in yields between French 10-year notes and German 10-year notes. As you can see, it just exploded to 190 basis points (1.90 percentage points). That’s a fresh euro-era record … and proof that investors are increasingly worried France will lose its AAA rating.

These aren’t small peripheral nations like Greece we’re talking about. They’re huge countries like Spain and Italy, and even “core” European nations like France, whose bond markets and economies are now tanking.

Even in the U.S., short-term borrowing costs are rising steadily as banks find it tougher to find other banks willing to lend to them. Three-month LIBOR just hit 48 basis points, the highest level since last July.

Plus, the 2-year swap spread is blowing out. It hit 53 basis points this week, the highest level in 17 months. That’s an indicator that banks don’t trust other banks, and are demanding they pay much more if they want to enter into derivatives transactions.

Bottom line: Credit markets are going nuts! Several indicators are at levels not seen since the depths of the 2007-2009 crisis, or headed in that direction. Others are much WORSE now than they were then. These were clear LEADING indicators of a stock market collapse back then, and I believe they are clear leading indicators of a stock market collapse now.

The only thing propping up stocks was the “year end” effect … the need for bullish portfolio managers to juice stocks in order to pad their own bonuses. But I don’t think that one minor positive is enough to offset the complete collapse of the global credit markets. In fact, the next major leg down may now be getting underway.

This is all for now, please stay tuned as this crisis unfold in the near future.

Good trading and invest safe.

Erik