As it turns out, French president Nicolas Sarkozy is more than a government leader, his is also an investment advisor. In the last year when Europe’s debt crisis was not doing so great, Sarkozy suggested that European banks that were in trouble could make profits by taking out cheap loans from the European Central Bank and using that loan, invest in government bonds. According to an ECB report, the “Sarkozy trade” turned out to be very popular, especially in Spain and Italy bonds.
Data shows that after the ECB began offering cheap three year loans in December 2011 and February 2012, demand for government bonds was up vastly due to higher demand from Italian and Spanish banks. Last month alone, Italian banks bought 23 billion euros worth of European government bonds which now puts the banks at 45.6 billion euros so far this year. Back in December when the future of the euro was being questioned, Italian banks bought a paltry 12.4 billion euros worth of government bonds.
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Spanish banks bought 38.7 billion euros of government bonds in January and February of this year, compared to just 13.3 billion euros in the entire second half of 2011.
However, there is some bad news to this bond buying bonanza. Since these banks have been buying government bonds hand over fist, the interest rates of the bonds have dropped which gives people the false feeling of confidence. We will not fully know the situation Europe is in until the ECB stops offering cheap loans.
Some economists are concerned that Europe is still in a rather dark state but everyone is ignoring it because the indicators are being skewed due to all the bond buying. Unfortunately, the economists also believe that the second set of loans has not fully kicked in yet, which could further show positive data when really the underlying problem still lurks.
Sarkozy was smart to think of this way for banks to make money and help out governments at the same time. What he did not see was the possibility to mask the underlying problem so that everything looks better when in reality it is not. Regardless, Sarkozy could be the man that saved many banks from collapse, particularly in Spain and Italy.
The bottom line here is that Europe is still a mess and could be for a long time. However, there are some positives coming out of the region such as banks being able to get loans from the ECB and investing that money in government bonds. Smart thinking, Sarkozy.
Perhaps if Sarkozy loses the upcoming election, he can move to London and open up his own hedge fund.