The yield on 10-year Spanish bonds popped back above 6% yesterday and Italian 10-year yields stand at 5.66%. Such rates, if sustained for long periods, are simply unaffordable. Unsurprisingly, bank shares across Europe were also whacked yesterday. The problem is twofold. First, the politicians didn't get to grips with the size of Greece's debt problems. After a round of modest haircuts for private-sector creditors and a reduction in the rate on the interest rate charged on the bail-out loans, the country's debt-to-GDP ratio should no longer hit 170% soon. But the revised figure – maybe 130% – still looks too high to allow Greece to recover. Its economy is still too uncompetitive and you have to be an extreme optimist to believe tax receipts will arrive when they are due. So a third Greek bailout looks like only a matter of time. Get ready for more bitter rows over how the pain should be distributed between holders of Greek bonds and the taxpayers of other eurozone countries. That is no way to encourage companies to invest or consumers to spend – but it is the way to try the patience of German taxpayers. The second problem is the design of the European Financial Stability Facility – the rescue fund that is to be the first line of defence against speculative attacks. But how would Italy and Spain be defended in practice? The EFSF has been handed powers to intervene but no new cash. A fighting fund would have to be raised by passing the hat round member states – a challenge that looks a tall order today.
Access Investments-Building Awareness - European Union-ROMANIA
Tuesday, July 26, 2011
The yield on 10-year Spanish bonds popped back above 6% yesterday and Italian 10-year yields stand at 5.66%. Such rates, if sustained for long periods, are simply unaffordable. Unsurprisingly, bank shares across Europe were also whacked yesterday. The problem is twofold. First, the politicians didn't get to grips with the size of Greece's debt problems. After a round of modest haircuts for private-sector creditors and a reduction in the rate on the interest rate charged on the bail-out loans, the country's debt-to-GDP ratio should no longer hit 170% soon. But the revised figure – maybe 130% – still looks too high to allow Greece to recover. Its economy is still too uncompetitive and you have to be an extreme optimist to believe tax receipts will arrive when they are due. So a third Greek bailout looks like only a matter of time. Get ready for more bitter rows over how the pain should be distributed between holders of Greek bonds and the taxpayers of other eurozone countries. That is no way to encourage companies to invest or consumers to spend – but it is the way to try the patience of German taxpayers. The second problem is the design of the European Financial Stability Facility – the rescue fund that is to be the first line of defence against speculative attacks. But how would Italy and Spain be defended in practice? The EFSF has been handed powers to intervene but no new cash. A fighting fund would have to be raised by passing the hat round member states – a challenge that looks a tall order today.
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Spain and Italy once again paid sharply higher yields than a month ago to sell short-term debt Tuesday, indicating that euro-zone bond markets remain fragile despite last week's agreement on a second bailout for Greece.
Treasury-bill auctions in both countries were closely watched for indications of investor demand ahead of bond auctions by Italy on Thursday and Spain next week.
Bonds from both countries came under heavy pressure prior to last week's Greek deal, with yields hitting successive euro-era highs, fueling fears that the ...
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