August 4, 2011
The struggle to save the euro, notes the boss of one of Europe's biggest banks, is a battle between the markets on one side and the political will of France and the strength of the German economy; the markets should not underestimate these. Such martial words might be more inspiring were they accompanied by evidence that Europe's leaders and its central banker are able to overcome their differences for long enough to act decisively. Yet instead of a robust defence of its weaker states, Europe is throwing its reserves into battle piecemeal with a series of failed interventions.
The battle to prevent Italy from losing the confidence of bond investors entered a dangerous new phase on August 4th when the spread (ie, the premium) demanded by investors to buy its debt compared with Germany's widened to around four percentage points, as Italian shares wilted (see chart). The headline yields on its bonds shot to 6.15%, which if sustained would eventually make the burden unbearable. That point is still a fair way off: Italy's bonds typically have fairly long maturities, so it would in the shorter term be paying only slightly higher average rates on its borrowing. Yet wild swings in the prices of bonds tend to scare away many of the long-term investors that traditionally stock up on them, by making them appear riskier, and thus can lead to a self-sustaining cycle of sell-offs. Nevertheless, confronted with the risk of Italy losing the confidence of markets, Silvio Berlusconi, the prime minister, this week offered only platitudes, urging Italians not to be scared.
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