Now Europe's Core Is Getting Contaminated

Morgan Stanley's emerging market strategist, Rashique Rahman, writes:

"...the structural problems in Europe are not solved. Liquidity provision or not, sovereign credit risk has not gone away. Our work suggests ongoing deterioration of DM sovereign creditworthiness going forward, manifested by further downward credit rating pressure. Additionally, the transference of periphery Europe indebtedness to that of core Europe via the stabilization fund – and further, via ECB purchases – bears very close monitoring. Contamination to the core (of DM) lies at the heart of contagion for EM – which again is manifested through DM funding market stresses. The story is not over."

This is what I have been saying. As the core countries take on an increasing share in the "guaranteeing" of all this bad debt, their debt will come under attack, too!

Pimco is long German bonds. Remember my post, where I pointed out that Pimco CEO, Mohammed El-Erian seemed to not understand that German bonds were infinitely more risky than Treasuries. Well, he sold Treasuries and bought bunds recently. That's a trade that could very well end up blowing up Pimco.