Markets pass judgment on the eurozone


I said that the Americans would be warning against complacency here at Los Cabos. Since then the financial markets have made their job a lot easier.

There's not much room for complacency when the Spanish government's long term cost of borrowing is edging toward 7.3% and it has just paid more than 5% to borrow for one year. A few months ago they were paying less than 3% for one year money.

Italian borrowing costs have also jumped this week, to well over 6%.

German officials think the world is too easily spooked by rising bond yields.

When it comes to the cost of government borrowing, they say there's nothing magical - or deadly - about interest rates that begin with a six, or even a seven.

Remember, Spain and Italy are only paying those rates on new debt - and they don't pay it at all unless they have to raise money from the markets at the time when the yields have spiked.

Unfortunately for Spain, the government is indeed planning to raise more cash - in the form of longer- term bonds - on Thursday. Investors and others will be watching nervously to see how that plays out.

Germany's basic point still stands. Italy and Spain could carry on paying these high rates on new debt for quite a while without getting into serious trouble. "Sticker shock" at the 6% or 7% price tag shouldn't spook governments into promising fancy schemes at summits that they can't actually deliver (for more on this line of argument, see Friday's blog on Chancellor Merkel).

But, and this is a big but, that argument assumes that investors will continue to be willing to buy Spanish, or Italian, debt, as long as the interest rate is high enough. That is not necessarily true.

The spike in yields isn't only telling us that their debt is now perceived to be more risky. It could also be telling us that a rising number of investors do not want to buy it at any price. That really is something worth losing sleep about.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 111.

    98 Chriswz

    I think the crisis is caused by not addressing trade imbalances, which has necessitated the invention of sticking plasters to keep the wheels turning.

    Eventually everything breaks.

    America certainly is guilty of this.

  • rate this

    Comment number 110.

    60 Chris London

    PS I also meant to raise the point we pay pensioners to do nothing! I accept they are not paid enough.

    So why not others. United Dreamer summed it up better than me.

  • rate this

    Comment number 109.

    76 Chris London

    First paragraph - totally agree, although for me the depression has not started yet. (Mind you I am totally mistyfied by the drop in unemployment).

    Yes we have lived beyond our means, but look at China, things progress and so will we in the West.

    Problem is those in power have no vision. When DC pick on a comic, who has done nothing wrong, it makes DC the comic.

  • rate this

    Comment number 108.

    Every good ponzai scheme comes to an end.

    In our coffee room today, I walked in to here one of our folks state that money "comes from work". When I pointed out that 99% of all Euros came from thin air, via expansion of the money supply, I did not mean that work was for suckers. But it did stop the moralism about the virtue of work. Why work, if money comes from the central bank? It's a question.

  • rate this

    Comment number 107.

    Uh oh . . . The Karlsruhe judges today found that the center-right coalition government led by Chancellor Angela Merkel had breached the rights of the German parliament

    This seems worth a mention me thinks!


Comments 5 of 111



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