Categories EMU The New York Times on the Euro Post author By Philip Lane Post date January 24, 2009 6 Comments on The New York Times on the Euro The New York Times has an article on the adjustment difficulties facing peripheral members of the euro area that have seen booms turn into busts. The article is here. This graph of sovereign debt spreads is especially striking. Related ← Life outside the Eurozone → The labour demand curve slopes down 6 replies on “The New York Times on the Euro” The Property Pin has lots and lots of scary graphs like that. Theres a lot of discussion there on CDS and bond spreads. And they are the real action people. We are now x2 Germany (290bp over 10y bund) and rising fast. Part of the widening in euro sovereign bond spreads will, I feel sure, be permanent. Up to very recently spreads were implausibly low — not even reflecting the agency ratings, for example. Patrick: its interesting to note that for a while we had a negative spread v Germany (-2,3 bp but still) Far too little discussion is focused on this. do we know (im sure you or someone does) the refinancing schedule for the rest of the year? We are looking at 10y bond yields this week breaking over 6% and heading north. What is the average annual cost of funding assumed in the budget? Less than it will be, I suspect NTMA statement of 11 December indicated only €5 bn to be redeeemed this year and €1 bn next. Despite evident setbacks to the public finances, market reaction seems overdone. Govt has sizable capacity for increased taxation and much headroom on the debt ratio. i think the widening in the spread over german bunds must be driven by the blurring between sovereign risk and bank risk. For example, Spain’s bank guarantee is capped at €100bn with potential to extend to €200bn. this surely must explain why the spreads on spain’s debt over bunds is lower than ours, even though we have a better sovereign rating (coupled with the fact that their banking system seems to be in better shape..) Patrick Thats useful. However, there is another issue which Enrique alludes to which is that the state is now responsible for the rollovers of Anglo (and others soon perchance) interbank and other liabilities. In the context of this, its not clear to me that the market reaction is anywhere close to overdone. Factor in a small probability of the guarantee being required to be met and there is, I submit, a lot less headroom. Bank Risk is now sovereign risk and with (at max) 400b+ of same out there and probably at least 30-40b to be required for the banks black holes, the evident deterioration we see is easily explained. Comments are closed.