Euro we go again
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The bond markets finally have something nice to say about Greece and Spain. Or at least Greece and Spain are reaping the benefit of ECB president Mario Draghi’s recent comments. Last week, Greek bond yields fell to pre-bailout levels, and the Spanish government sold $7 billion of debt at the lowest rates since the crisis — lower, in nominal terms, than the US government is paying to issue Treasury notes.
After keeping rates unchanged last week, Draghi told the press that the central bank “talked about lower interest rates, we talked about a lower deposit facility rate, we talked about prolonging the fixed-rate full allotment, we talked about QE”. The central bank is fighting falling inflation across the region, and deflation has already hit at least five eurozone countries.
Bloomberg View’s Mark Gilbert tries to make sense of the fact that “Spain, where more than a quarter of the nation is unemployed, is paying less than the world’s biggest economy, which also happens to own the global reserve currency of choice and the deepest and most liquid bond market anywhere”. The only explanation he thinks makes sense is that the “bond market is telling us that it thinks quantitative easing is coming to the euro region”.
Angel Ubide tells Bloomberg Businessweek’s Peter Coy that the market could finally be coming to terms with the fact that Spain won’t require a debt restructuring. And as the inflation outlook falls, yields have responded. In other words, Ubide thinks the “euro area is becoming like a regular country”.
The FT’s Gideon Rachman has a great piece on the state of the eurozone two years after Draghi’s “whatever it takes” dictum stabilized crisis-ridden bond markets. The euro crisis, he concludes, isn’t receding, it’s simply relocating: Fears about the periphery have been replaced by worries about France and Italy. With double-digit unemployment, the prime ministers of France and Italy, Rachman writes, are “increasingly chafing at the budgetary constraints imposed on them from Brussels, and policed from Berlin”. They want to focus on increasing growth, not cutting spending and reducing deficits.
There’s also the problem of inflation. The FT’s John Authers notes that “inflation in the eurozone has been decreasing for a while, to 0.5%. This is far below the ECB’s 2% target”. It’s unclear whether Draghi would be legally allowed counter the threat of deflation with quantitative easing.
And even if Draghi does do ‘whatever it takes’, says Rachman, “I just fear that, ultimately, it may not be enough”. – Ben Walsh
On to today’s links: