Financial Times
July 22, 2011
“The politics and the markets are coming together.” José Manuel Barroso’s comment after the eurozone’s emergency summit has the ring of famous last words. In the short term, the president of the European Commission is right: the outcome was an upside surprise. The measures agreed provide breathing room to reassess where the risks now lie in the eurozone government bond market.
That accounts for the sharp narrowing in spreads of peripheral bonds over German Bunds, which continued apace on Friday. Greek 10-year spreads closed another 170 basis points of the gap over Bunds, while Irish and Portuguese paper also tightened. But that is tantamount to a mortally sick patient responding to an urgent dose of medicine. The summit outcome led everybody back from the brink. That was a necessary first step, but hardly a sufficient one.
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