Bond yields across the Continent jumped as prices dropped, in a sign of investors’ faltering confidence in officials’ ability to keep the debt crisis contained in the euro zone’s troubled peripheral countries. Tuesday’s selloff came amid news that the euro zone’s economy scarcely grew in the third quarter.
Trading of anything but German bunds—seen as safe securities akin to U.S. Treasurys—became difficult. Investors sold bonds issued by triple-A rated France and Austria. Even prices of bonds issued by fiscally upright Northern European triple-A nations such as Finland and the Netherlands fell. Among the cash-strapped periphery, Italian bonds again rose above 7% and Spanish yields surged to 6.358%, according to Tradeweb. …
Tuesday’s plunge began in Asia and the Middle East, where there was heavy selling of European bonds, market participants said. Of note also, they said, was that much of that was coming from long-term investors such as pension funds and mutual funds, rather than hedge funds. …
Germany’s central bank, the Bundesbank, and the country’s economic and political mainstream are vehemently opposed to a more activist ECB, arguing that large-scale bond-buying would fuel inflation and turn the central bank into a plaything of spendthrift Southern European politicians.
The more the crisis of investor confidence spreads into Europe’s core economies, however, the less euro-zone governments can do to solve it. Already, France’s government is wary of any policy measures that could call its vulnerable triple-A credit rating into question and drive up its borrowing costs.
If the capital flight from bond markets continues, the ECB will increasingly become the only institution in Europe that is capable of stabilizing the situation. A change in thinking in Germany would likely be needed before the ECB embraced a bigger firefighting role, however. …
Investors are also paying more for protection against debt defaults. The five-year credit-default swaps of Italy, Spain, France and Belgium all hit records, while the levels for Austria and the Netherlands pushed wider as well. Italian default swaps briefly pierced 600 basis points for the first time.
Europe is at one of those impasses whereby the Germans don’t want the ECB to print the eurozone out of the problem, yet, with bond yields going up, it puts pressure on these countries’ ability to pay their debt. This is scaring off investors, so rates are climbing.
Two days ago, Bundesbank president Jens Weidmann said that Germany is strongly opposed to the European Central Bank buying sovereign debt of eurozone countries:
Mr Weidmann highlighted the stance being taken by the Bundesbank by arguing governments, not central banks, were mainly responsible for ensuring financial stability. Mario Draghi, the ECB’s new president, has said it is not the ECB’s job to act as lender of last resort, but Mr Weidmann went further, saying such a step would breach Europe’s ban on “monetary financing” – central bank funding of governments.
If you think political impasses are confined to the U.S., then let me introduce you to the fiasco that is the euro. There are only two things that can happen here. They can let these countries who are about to default, default. That would mean massive economic chaos in not only those countries, but it would spread to the rest of Europe and ultimately to the rest of the world as economic activity declines. Or they can print.
Germany can complain all it wants about the inability of its fellow EMU members to solve their fiscal problems, but for many of them the situation is critical. I believe that the European Central Bank will print. That is, they will engage in massive buying of bonds of member states, thereby monetizing sovereign debt. And, if Italy, France, Spain, and the Netherlands continue to be hit with rising interest rates, that time is not far off.
Germany thinks they have a veto here, but they don’t.