Yields on the sovereign debt of Greece and Portugal hit record levels Monday and the euro tumbled sharply amid renewed concern about sovereign debts.
The latest sell-off was triggered by comments over the weekend from German officials about the likelihood of a Greek debt restructuring. Germany's deputy foreign minister said a restructuring "would not be a disaster" while an unnamed official said a restructuring "will probably not be avoidable," Reuters reports.
"The risk they're taking in talking about [Greece] this way, is that these discussion can take on a life of their own," says Mark Dow, a fund manager at Pharo Management, which has about $4 billion of assets. "If for some reason the calculus were bad that 'the trial balloon can be controlled', all of a sudden it will start to move events forward" and trigger concerns about Europe's other sovereigns, including Spain.
Dow foresees eventual debt restructurings for Greece and Portugal, but believes they will take the form of lower coupon payments and/or extended maturities vs. actual destruction of principal. In other words, any "haircuts" the bondholders have to take won't be too severe.
"I think they'll be able to control this and the ring-fence is robust enough" to keep the "core countries" of Europe largely insulated, Dow tells Jeff Macke and me in the accompanying video.
Dow, a former staff economist at IMF and Treasury, believes European policymakers have the tools necessary to build a "ring-fence" around problems in the EU's "periphery" -- provided they're able to maintain control of the process.
This weekend also brought gains for the True Finns party in Finland's election -- another sign of the growing bailout backlash, which is only going to complicate the EU's already difficult mission.