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
    -4

    Comment number 45.

    The UK has the advantage that it is not in the EZ and can reduce interest rates and follow this up with QE and thereby effectively devalue. But the PIIGS can "internally devalue" and should do so.

    It is not austerity if they reduce the size of the bloated state to the appropriate size and let their hard working private sectors pay more appropriate bills that are affordable.

  • rate this
    -3

    Comment number 55.

    in spite of all the problems in Greece, still dodging their taxes, still retiring early, still a bloated civil service, stop giving them handouts, call their bluff, let them leave the Euro.

  • rate this
    -2

    Comment number 33.

    29JfH

    No thanks John IMO we can leave the euro or its 2nd tier option presumably called eurine to the carnival, somebody else can run away and join the circus. I am amazed with all the scenery falling down you still support the idea, it looks so much fun, like giving explosives to kids. EZ is a weapon of mass employment destruction which will suck in all in its path. Printing will be boggling

  • rate this
    -1

    Comment number 25.

    #21 you are totally right as Germany setting the rules is not going to work, even if they are good rules too. Greeces and to soem degree spains problems are historical and have not been addressed over the last 10 years or so, which in part you could sya has been germanies iggest failing but then they had to sort out east germany first

  • rate this
    -1

    Comment number 26.

    #21 you make agood ppint then at 23 mis the plot.

    50% might be the lesser of the evils of turning spain into an untter waster land in 10 years time

 

Comments 5 of 111

 

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