Saturday, January 17, 2009

The Debts of the Spenders: The Euro - Diverging Bond Yields Show Systemic Cracks

How can a monetary union coordinate economic policy when member states cannot even acquire a common interest rate spread? Granted, complete convergence of yields is not possible given the breadth of diversity within the union but a NARROWER trading band should be possible.

But, instead the bond markets are telling European governments that they are pricing in HIGHER risks (either interest rate risk or the previously unthinkable default risk) for peripheral member states than the core industrial and economic powerhouses of Germany and France.

Spain, Portugal, Greece, and Italy (Ireland will soon be added to the list) are some of the most debt ridden states w/in the Eurozone. Capital markets were always lacking to begin with but the global economic freeze has placed additional strain on governments to increase social spending. Everyone wants a bailout in tough times . . . but who can fund it?

Certainly not the corporate taxpayer - business was never a strong pillar to begin with in the bureaucratic and openly hostile morass of Western European regulation. Tourism, the other main source of revenue, for these musuem states (for that is what they are - capitalizing on the grandeur of the past instead of moving forward into the future) is also in decline given the reluctance of travellers to embark much farther from their native shores.

That leaves only the bondholders. And their message is quite clear: