Eurozone bonds hit by mass sell-off, crisis may be entering “dangerous phase”

Update: Krugman adds, quoting Edward Harrison at Naked Capitalism:

If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice[.]

Not to put too fine a point on it, if the European Central Bank guarantees Europe’s sovereign debt (after all, that’s what central banks do), this crisis reduces to a problem. Watch the bank; it’s all in their hands. Quoting Krugman again: “Crunch time.”

This is news as of Tuesday evening EST. Financial Times (h/t Paul Krugman; my emphasis):

Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands.

The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.

“Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. … Mike Riddell of M&G;, one of Europe’s biggest fund managers, called it “probably the most worrying day” of the crisis so far.

The rise in bond yields affected all main eurozone countries apart from Germany, and suggests that the two-year-old sovereign debt saga could be entering a dangerous phase.

There’s more in the article if you’re following this stuff closely.

190 basis points is almost 2% — that means that France (not just Italy, France) must now offer investors 2% more in interest than Germany offers for bonds with identical maturities.

Paul Krugman has a handy chart that shows you, historically, what a spread of 189 basis points between (known-safe) German sovereign bonds and French bonds looks like.

Time for more austerity, don’t you think?


Gaius Publius is a professional writer living on the West Coast of the United States.

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