After Congress Comes Together, Eurozone Is Still Falling Apart
Finally, the deal has passed the Senate and the House. Which means we now return to our regularly scheduled programming: panicking about Europe. Italian and Spanish bond yields are soaring:
The flurry of activity came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 per cent and 6.25 per cent, respectively. The premiums Madrid and Rome pay to borrow over Germany also reached new euro-era highs of 404 and 384 basis points. Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs.
The premium France pays to borrow over Germany also hit a euro-era high of 75bp. Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading. "What can be announced to really break that? It is difficult to see," said Laurent Fransolet, head of European fixed income research at Barclays Capital.
The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy. It has been heightened by worries about the possibility of recessions in the US and Europe, which has led to frenzied buying of perceived safe-haven debt including Germany, the US and the UK.
There's some thought that once the rates hit around 7-8%, they enter a death spiral: debt service costs grow faster than the ability of the economy to service them, and since bond buyers know that this raises the risk of default, they demand higher interest rates, which just makes it all worse.
Where does this end? I wish I knew. The Euro-Optimist argument seems to be that the euro cannot hold together without massive fiscal integration--transfers, plus a guarantee of these debts. It seems to me that this is true. But like Tyler Cowen, the conclusion I draw is that the euro will probably not hold together, at least not in its current form.