Friday, January 16, 2009

Eurozone Interest-Rate Spreads



Jean Quatremer calls attention to increasing interest-rate spreads on Eurozone sovereign debt (with the German 10-year bond as a benchmark). France is paying a small risk premium of 38 basis points relative to Germany but has improved its position relative to the Eurozone average (see graph). More surprisingly, so has Spain (which has suffered from a severe housing bubble). Greece and Italy are in the biggest trouble in the eyes of bond traders. Quatremer wonders whether the euro will survive the pressure. At this point I think the fears are exaggerated, but let's see what the fallout from the latest round of US bank troubles will be.

8 comments:

Anonymous said...

You don't think the Eurozone will survive? I don't quite understand the scenario or path that leads to its disintegration - what would it look like in you view?

Unknown said...

Whoops, sorry, I wrote that too quickly. I've amended it now. Thanks for spotting the mistake.

Anonymous said...

There was an article by Willem Buiter in the FT the other day that basically said "Eurozone will survive, don't be silly". It's at

http://blogs.ft.com/maverecon/2009/01/sovereign-default-in-the-eurozone-and-the-breakup-of-the-eurozone-sloppy-thinking-101/

Anonymous said...

Ah, I suspected as much (that you didn't think it was doomed)!

Anonymous said...

Although my comment stands - I don't really understand what circumstances or events would lead to the breakdown of the EMU. Is tehre provision to expell members who default on their sovereing debt for example?

Unknown said...

If the crisis gets bad enough, there is a possibility that some countries would abandon the euro in order to recover another policy instrument with which to deal with a difficult situation.

Anonymous said...

True (speaking from Ireland I'm all too aware!), but in that case I would have thought that the relevant danger-metrics would relate to broader economic indicators such as exports, competitiveness or delation risks, all of which could theoretically be helped by an independent currency/monetary policy. Ireland's competitiveness, eg, would benefit from a weaker currency and this would help it avoid a deflationary spiral but it would hardly reduce its borrowing costs (adding currency risk to default risk) especially since those costs would still be euro-denominated.

Unknown said...

A wide spread must surely strengthen Greece's determination to stay in the Eurozone, as it shows that the cost of leaving would be immense. All of these so-called analyses are produced by would-be economists who don't have the most elementary knowledge of financial macroeconomics. I, like Professor Buiter, am bored by this recurrent drivel.