Busch: European Sovereign Animal House

Over the last two days, there have been several assurances by officials in Europe that their fiscal positions are improving and that the European sovereign debt situation is improving.

Yesterday, the Portuguese secretary of state Carlos Costa Pinto said that Portugal has vowed to meet ambitious deficit-reduction targets. "We're on the right track and we will meet our deficit commitments this year and in the future.....There is no cause for alarmism." Also, Spanish PM Zapatero stated emphatically that "Our bonds are solid...All new sovereign bond issuances have been successful. The prices that we need to cover our financing needs are good."

Euro coins
Euro coins

Today, we have more commentary with conference panel appearances in Berlin by Greek Finance Minister George Papaconstantinou, European Financial Stability Facility CEO Klaus Regling, Portuguese Finance Minister Fernando Teixeira dos Santos and EU Commissioner for Economic and Monetary Affairs Olli Rehn.

Clearly, there is a coordinated push to call market fears.

However, the spreads of Irish-German bond spreads are at a record 417 basis points, Portuguese-German bond spreads are at a record at 394 basis points and the Markit iTraxx SovX Europe Index of CDS for 15 countries is nearing it's all time highs at 166. One has to wonder what is fact and what is fiction.

What comes to mind is the film Animal House. During the famous parade scene, actor Kevin Bacon tries to stop the crowd stampede by saying over and over, "All is well" as he is literally flattened. There's a disconnect between the message and reality.

Today's weak European purchasing manager's index for both manufacturing and services underscores the salient issue for Europe: slowing growth. The austerity measures are reducing government spending and transfer payments. In turn, this reduces initially the economic growth and therefore tax receipts used to support fiscal deficits.

While the $1trln European bailout fund has helped, the debt problems have not been resolved and will resurface as GDP fails to generate funds. The rest of the PIIGS are doing their best to avoid borrowing from the fund, but more aggressive action on their economies is needed. Time for bold action is needed, but more is not on the way yet.

So far, all we've heard is "All is well!”

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.