By Neil Unmack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
There’s little doubt that markets think the euro crisis is over. Bond yields have fallen below pre-crisis levels for most of the countries formerly known as peripherals; the grab for southern European assets is a crowded trade. Could this be the prelude to the next Minsky moment?
The last crisis fit perfectly the pattern described by the American economist Hyman Minsky. Investors’ exaggerated belief in stability leads them to price assets for perfection - for example no defaults by euro zone sovereigns. Then some imperfection arrives - a serious possibility of default - and there is a violent outbreak of instability - the euro crisis.
The excessive euro-confidence lasted for about a decade, from 1998 to 2008, although the crisis took a further two years to properly get going. During most of that time, investors demanded a mere 0.2 percentage points higher interest rate on Portuguese than on comparable German debt, down from over 5 percentage points in 1995. At the height of the crisis in 2012, the spread was 15 percentage points.
Confidence is certainly returning. Investors now demand a smaller premium to hold bonds sold by companies in the periphery over those in the northern European “core” than they did before the 2008 financial crisis, according to Credit Suisse. Banks in Spain are trading at a bigger premium to book value than their U.S. peers, according to Starmine. And the interest rates paid by the formerly problem case governments of Spain, Portugal and Italy are at record lows.