Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

11 April 2012

FT: Reawakening of eurozone crisis fuels concerns


Markets showed they were unimpressed by recent pronouncements by European politicians that the worst was over, by pushing Spain and Italy's borrowing costs towards levels that prompted bailouts for other peripheral eurozone countries.

This promises to be one of the more dangerous phases of the crisis with the attention firmly focused on Italy and Spain, the eurozone’s third and fourth-largest economies.

Madrid in particular finds itself in a tight spot with its benchmark 10-year bond yields hitting 6 per cent for the first time since November. Investors were spooked by the admission in March that Spain would breach its budget targets for this year. However, they also fret that the deeper austerity, announced over the Easter weekend by the government, will push the country further into recession and maybe even spark social unrest.

But the market is now subtly re-evaluating the European Central Bank’s cheap three-year loans to banks, known as LTROs or longer-term refinancing operations. When they were announced in December, their effects were at first largely ignored, but then they were described by many as a “game-changer” in January. Now the worries have resurfaced with a belief that they have done nothing to help the particular weaknesses in the eurozone.

For many, this wave of domestic buying is a worry for several reasons. Most notably, the LTRO has reinforced the intertwined relationship between banks and governments. Banks, already laden with government debt, have taken on more, largely it seems in a bet that they would be in deep trouble in any case if there was a sovereign default.

Full article (FT subscription required)



© Financial Times


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment