The rise in periphery bond yields is sovereign debt crisis, round 2

I have long warned that the euro crisis was going to return. But recently the concern I voiced in posts here was more concrete i.e. that the renewed recession fears in Europe would force a decoupling between the periphery and the core in the Eurozone. This seems to be occurring.

Today the FT wrote that:

Greece’s long-term borrowing costs breached 8 per cent on Thursday – the highest since early February – as investors fretted over the possibility that upcoming elections could derail the country’s chances of a clean exit from its bailout.

The Greek 10-year bond yield rose 81 basis points by late morning to 8.68 per cent. Just a week ago the yield was 6.6 per cent…


Portugal’s 10-year debt yield rose 15.2 basis points to 3.44 per cent, a two-month high. Italian 10-year borrowing costs were also at their highest since mid-August, up 17.9 bps to 2.58 per cent. The yield on Spain’s 10-year benchmark rose 18.5 bps to 2.26 per cent. 

It is that last paragraph that worries me. Greece never fully recoupled and can legitimately be considered a separate case. The steep rise in yields, however, means a full fledged crisis in European sovereign debt is upon us. Moreover, Portugal, Spain and Italy’s yield rise is worrying because it could turn what is now just a rout of Greece sovereign debt into a full-scale assault on the periphery.

Europe is not ready for another crisis. Italy is begging for stimulus of some kind and France is openly flouting the EC’s directives on debt. Meanwhile Merkel and her government are talking about meeting the growth shortfall in Germany with budget cuts and Finland wants to redouble budgetary restraint efforts to win back favour with the ratings agencies. So, on the core budgetary issues, despite the move to backloaded austerity, we are now at a point where what backloading means exactly has become an acutely problematic political, economic and market issue.

I don’t know how this gets resolved. Further, I believe the ECB’s actions are circumscribed by this lack of agreement because the Germans will not accede to bond buying when there is this divergence on budgetary issues. We are headed for more turbulence in Europe I fear.

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