Financial Times
May 30, 2012
Eurozone investors have little more than black humour to lighten their days. “Grexit” has quickly become established jargon for a Greek exit, but markets on Wednesday were showing clear signs of “Spanic” – panic over Spain.
The flight to safety pushed the yield on German two-year bonds to zero for the first time ever, making them rather like banknotes that one cannot spend. Banknotes are harder to store in bulk but, as Germans discovered in the 1920s, in a pinch make handy wallpaper.
The euro fell again. Every major equity market dropped and Spanish 10-year bond yields rose above 6.7 per cent, a level breached on only four days in eurozone history. Investors question the ability of the flip-flopping government to cope with its failing banks and wobbling regional finances.
Investors are increasingly betting on deflation as the outcome – not inflation. The German bond market is priced for inflation at just 1.3 per cent over the next decade, lower than last autumn’s pricing.
But the survival of the euro remains the big bet. Investors hope German bonds will pay them back in more valuable Deutschmarks in a break-up.
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