July 14, 2011
As anyone who has watched The Towering Inferno will know, what starts as a small electrical fire in a cupboard can eventually consume an entire skyscraper. When Greece’s debt problems emerged last year, some dismissed them as trivial, given the country’s 2.5% weight in the euro area’s GDP. Similarly, problems in the subprime-mortgage market were once regarded as too obscure to affect the entire American economy.
The failure to extinguish the Greek flames has allowed the conflagration to spread to Ireland, Portugal and, intermittently, to Spain. Now smoke has been seen in the Italian bond market. On June 12th Italian ten-year bond yields briefly rose above 6%; the spread (excess interest rate) over German Bunds was more than three percentage points.
The sell-off may have been so rapid because investors previously assumed that Italy was behind the firewall. They were hungry for yield but too cautious to buy the risky bonds of Greece, Ireland and Portugal. So they loaded up on Italian debt as a higher-yielding alternative to that of the core European countries of Germany and the Netherlands.
More
No comments:
Post a Comment