Conflicting pressures for the euro zone bond market today – a strong signal from Germany that it is willing to increase the firewall built around the currency bloc but ongoing concerns that Spain is being dragged into the mire.
Litmus tests are provided by an auction of a mixture of Italian debt worth up to four billion euros and the sale of short-term Spanish t-bills. While Spanish yields on the secondary market have come under pressure there has been no sign yet that primary sales will have any difficulty, given the more than 1 trillion euros of three-year ECB money sloshing round the financial system.
Italian Prime Minister Mario Monti and Spain’s Mariano Rajoy are both in South Korea for a nuclear summit and could well break cover.
Rajoy insisted on Monday he would press on with a tough budget on Friday despite only a pyrrhic victory in weekend elections in Andalusia but markets are on red alert since he ripped up a Brussels-agreed deficit target last month. Italy is getting more benefit of the doubt but for that to persist, Monti will have to push through labour reforms in the teeth of union opposition.
That makes it all the more vital that euro zone finance ministers, meeting in Copenhagen later this week, agree on a method of bolstering the crisis firewall by combining some of the resources left in the temporary EFSF bailout fund with the ESM, a 500-billion-euro facility that comes into force from July.