Thought the EU Summit in Brussels solved the euro’s problems? Well, think again. While the focus is on the debt ceiling crisis in Washington, the debt crisis in the euro-zone is showing fresh worrying signs. The bond vigilantes are back, and they are not alone.
The acceleration in the euro crisis, just before the summit, came on a huge sell off of Italian and Spanish bonds. The yields went up and fell sharply on the news from Brussels on Thursday. Well, things have changed again.
Spanish 10 year notes are now trading above the scary 6%. The move began on Monday and is accelerating. The cap before the recent crisis was 5.6%, and these levels were seen after the accord. We’re now at 6.06%, in the unsustainable zone.
Specifically in Spain, there are fresh news from the regions (communities) about missing deficit targets. This doesn’t come as a big surprise, as Spanish hidden debt was bubbling.
Italian 10 year bonds are at 5.7%, above the cap for Spain, and yes, at the ugly levels. Italian bank shares are still shaky.
The really worrying news from Italy is that they have cancelled planned bond auctions, claiming they have enough cash for now. Right. The markets are somewhat unfavorable, to say the least.
Around this time last year, Ireland also said that it has enough cash and won’t seek market funding anytime soon. It ended with a bailout for the Irish Republic.
Greece and Ireland
As expected, Moody’s downgraded the credit rating of Greece, and said that “implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%.”
This statement dominated the headlines, but other words are more disturbing. They highlighted the flaws in the Brussels accord: First, the debt relief for Greece is very limited. In addition, the national parliaments still have to set approve the changes to the EFSF, the changes that will allow it buy bonds in the markets on time, and prevent further crises.
And of course, they highlighted the obvious: a Greek default is a precedent. Ireland has even better arguments for defaulting on its debt. Here are 5 reasons why Ireland should default.
A different solution
The general notion was that this genuinely big move by the European leaders would be enough to push the euro crisis off the table until the end of the summer.
Well, the next round is probably around the corner.
One significant body that can make a difference in the crisis is the ECB: by lowering interest rates and by deploying a massive quantitative easing program to lower the yields and encounter the bond vigilantes.
Up to now, the ECB isn’t too helpful.
Regarding EUR/USD trading, it is currently dominated by the US debt ceiling standoff. For more on the pair, see the euro to dollar forecast.