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Not Just Italy: Mass Sell-off on Eurozone Bonds Yesterday

Image: Elena Schweitzer/shutterstock.com

This could be the moment when the Euro union begins to collapse. We know that Greek bonds are trading at astronomically high yields and that yields on Italian bonds were nearing the danger zone. But bond yields for every country in the Eurozone spiked yesterday, including countries in no real fiscal danger. The bond market is in full feeding frenzy.

Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands.

The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.

“Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. “There is convergence but it is convergence on the ­weakest.”

Under current arrangements, the Eurozone doesn’t even have the money to save Italy. If the core countries start to lose their credit ratings and cannot afford to borrow, we’re really just done here. Spanish debt is also above the level where they would need a bailout, another troublesome sign.

About the only country on somewhat solid footing is Germany, and this has sowed resentment, particularly because of their domineering response to the crisis. Austerity for thee and not for me is bound to create a backlash.

This is all happening because the European Central Bank refuses to honor the “central bank” part of its name. This is dragging down all of Europe. Edward Harrison works through the issues in Italy, which is ground zero here.

Italy needs to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant at present yields. It won’t ever be able to do so.

Therefore, yields for Italian bonds must come down or Italy is insolvent as it must roll over 300 billion euros of debt in the next year alone.

Austerity is not going to bring Italian yields back down. First, Italian solvency is now in question and weak hands will sell. Moreover, investors in all sovereign debt now fear that they are unhedged due to the Greek non-default plan worked out in Brussels last month. As Marshall Auerback told me, any money manager with fiduciary responsibility cannot buy Italian debt or any other euro member sovereign debt after this plan.

Conclusion: Italy will face a liquidity-induced insolvency without central bank intervention. Investors will sell Italian bonds and yields will rise as the liquidity crisis becomes a self-fulfilling spiral: higher yields begetting worsening macro fundamentals leading to higher default risk and therefore even higher yields.

Italian yields have subsided this morning, but the trajectory is clear. Martin Wolf is openly talking about an Italian default. That would be a world-crumbling event. And all the technocratic governments in the world won’t be able to stop that.

Image: Elena Schweitzer/shutterstock.com

CommunityThe Bullpen

Not Just Italy: Mass Sell-off on Eurozone Bonds Yesterday

This could be the moment when the Euro union begins to collapse. We know that Greek bonds are trading at astronomically high yields, and that yields on Italian bonds were nearing the danger zone. But bond yields for every country in the Eurozone spiked yesterday, including countries in no real fiscal danger. The bond market is in full feeding frenzy.

Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands.

The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.

“Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. “There is convergence but it is convergence on the ­weakest.”

Under current arrangements, the Eurozone doesn’t even have the money to save Italy. If the core countries start to lose their credit ratings and cannot afford to borrow, we’re really just done here. Spanish debt is also above the level where they would need a bailout, another troublesome sign.

About the only country on somewhat solid footing is Germany, and this has sowed resentment, particularly because of their domineering response to the crisis. Austerity for thee and not for me is bound to create a backlash.

This is all happening because the European Central Bank refuses to honor the “central bank” part of its name. This is dragging down all of Europe. Edward Harrison works through the issues in Italy, which is ground zero here.

Italy needs to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant at present yields. It won’t ever be able to do so.

Therefore, yields for Italian bonds must come down or Italy is insolvent as it must roll over 300 billion euros of debt in the next year alone.

Austerity is not going to bring Italian yields back down. First, Italian solvency is now in question and weak hands will sell. Moreover, investors in all sovereign debt now fear that they are unhedged due to the Greek non-default plan worked out in Brussels last month. As Marshall Auerback told me, any money manager with fiduciary responsibility cannot buy Italian debt or any other euro member sovereign debt after this plan.

Conclusion: Italy will face a liquidity-induced insolvency without central bank intervention. Investors will sell Italian bonds and yields will rise as the liquidity crisis becomes a self-fulfilling spiral: higher yields begetting worsening macro fundamentals leading to higher default risk and therefore even higher yields.

Italian yields have subsided this morning, but the trajectory is clear. Martin Wolf is openly talking about an Italian default. That would be a world-crumbling event. And all the technocratic governments in the world won’t be able to stop that.

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David Dayen

David Dayen