March 22, 2011
It was hardly a surprise – yet the official EU agreement to establish a permanent eurozone rescue fund sent the peripheral bond markets reeling.
Irish bond yields rocketed a full percentage point at one point on Tuesday and the cost of borrowing for Greece and Portugal lurched higher on the announcement that the European Stability Mechanism (ESM) will be launched in mid-2013.
Although the plans for the ESM, which will make investors share the burden of sovereign defaults, have been known since last October, it concentrated minds in the market that one of the peripheral economies will default.
Gary Jenkins, head of fixed income at Evolution Securities, says: “It is now written down in black and white from the EU that default is on the agenda. It is also clearly stated that private investors will have to pay up in the event of default.”
Greek, Irish and Portuguese bond yields have been rising sharply since the middle of January on increasing default fears.
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