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
    0

    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
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    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
    0

    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
    +1

    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
    +1

    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!

  • rate this
    0

    Comment number 106.

    105. This is not the answer. Current econ probs do not come from insufficient demand. UK needs to improve productivity, improve productive capacity of economy. . Govt is already borrwing massively with little or no positive results. Should we borrow more on basis of already massive priavte & public borrowing to drive deman?. The idea just doesn't hold water.

  • rate this
    0

    Comment number 105.

    Ultra low interest rates are signals that British people should get spending. That's what 'the markets' want & expect us to do!
    If we borrowed and spent more, others would get jobs and be able to spend more too.
    More jobs and spending would generate growth in tax revenues that would pay down the deficit.
    I'm following 'the markets' advice and spending as much as I can.
    What about you?

  • rate this
    +1

    Comment number 104.

    re#102
    Part of the problem, Phil, is that the sales tax brings in so much income that it cannot really be reduced without tax rises elsewhere. The high paid do not want to pay tax, the low & mid-paid are shouldering too much of the overall tax burden - so what to do? Inflation also leaves the Govt with a disincentive to reduce sales taxes.

  • rate this
    0

    Comment number 103.

    I guess will we should look forward to more and more QE to protect "our" banks from defaulting European banks.

    We should be told whose toxic debts we are bailing out. And the name of the traders who thought the risk was a price worth paying. Along with his address....

  • rate this
    0

    Comment number 102.

    The question should be should anyone care.
    To be honest all European governments should ease their tax burden reduce their sales tax and get their economies moving again, the scepter of inflation is so far off. You need growth NOW

  • rate this
    +1

    Comment number 101.

    It is all very well the markets passing judgment on the Eurozone and the EU...

    But when do we, the voting and tax paying public, get our chance? If Europe's politicians had asked and then listened to their respective electorates then we would not be in this situation.

    Listening to Barroso at the G20 was just plain embarrasing. Is that really the best that the EU/EZ has to offer?!

  • rate this
    +1

    Comment number 100.

    re#95
    So! The banking crisis made the leaders of some European countries within the EU come up with idea of a single currency and then they got the EU as a whole to adopt the idea, long before the sub-prime thing happened and even though they were then caught off-guard by unexpected events?

    Woooo! That's spooky ...

  • rate this
    0

    Comment number 99.

    "Should we be losing sleep over governments having to pay high interest rates to borrow money?"

    Certainly not....In the UK we just print more QE and dish it out at zero interest rate...Free Money as it were.

    Spain for instance has to beg and pay 7%.

    Lets hope Europe doesn't catch on...

  • rate this
    +1

    Comment number 98.

    Blaming the Euro crisis on Wall Street is nonsense. Just because two things happen at the same time doesn't mean they are connected. Spanish banks engineered their very own property bubble which has collapsed so badly it is endagering their survival. Likewise, Italy's inability to generate real growth and Greece's inability to collect taxes are also not the fault of the US.

  • rate this
    0

    Comment number 97.

    48 AFC its older than that guys anyone remember the hard and soft ECU proposals of the 1980's.

  • rate this
    +1

    Comment number 96.

    I remember paying 12% interest on my mortgage. I wouldn't lend the Spanish, Italian, Irish or German governments money at 6% never mind the Greeks.
    Alan

  • rate this
    -1

    Comment number 95.

    94 TP
    The underlying cause of all this is the Banking Crisis caused by the Anglo Saxon deregulated capitalist model, everything else is just a knock on problem. So Barrosso is right to ignore lectures from those that caused it all. Sub prime mortgages, CDS's , Quants (i.e. financial models that don't reflect reality) Until this exploded there was no European sovereign debt crisis.

  • rate this
    -1

    Comment number 94.

    91. Yes farcical comments from an arrogant european technocrat

  • rate this
    0

    Comment number 93.

    I find it hard to believe that it is legal to rig bond markets. For that is what they will be doing if the bail out fund is used to buy Spanish or Italian debt. It creates value where there is none.
    These rigged markets will unwind one day and large holders will be slaughtered with disastrous implications for insurers and pension funds

  • rate this
    +1

    Comment number 92.

    The silent reaction was deafening. Was the silence acceptance, guilt…or the fact EU knows, can prove that US caused the financial crisis; EU is aware of worthless derivative poison injected into financial markets. All I can say is Barroso was angry - as in: HOW DARE YOU! How dare you lean on Germany, insist Greeks stick to harsh austerity guidelines…
    HOW DARE YOU!

 

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