Is Europe’s core rotten?

August 3, 2011

Europe’s debt problems had thus far been largely contained to the so-called periphery, places like Greece, Ireland and Portugal. But increasingly, doubts are rising about countries once seen as insulated — Spain, Italy, even Belgium and France.

Bond markets are not painting a pretty picture. Ten-year Italian and Spanish yields are now firmly trading above 6 percent — 7 percent is considered the point of no return, the level above which funding costs become unsustainable.

The yield gap between 10-year Belgian and German bonds hit a fresh euro life-time high earlier, as did France’s equivalent. Belgium’s 10-year yield spread traded above 200 basis points — lower than around 370 basis points currently on the Italian equivalent but up sharply from readings in the double-digits seen last year.

All of this is stressing money markets: a key indicator of counterparty risks hovered near two-year highs. Analysts do not expect the kind of agitation witnessed at the height of the credit crisis in 2008 — mainly because they expect the European Central Bank will have their back.

As one trader put it: “(Belgium) is probably the next weaker nation after Italy. It is not surprising to me that they are struggling.”


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