The Return of Sovereign Debt Crisis?
Markets look to be turning back to risk averse mode after the Easter break is over. Not only was Friday’s US payrolls report worse than expected, but there are renewed concerns about the eurozone sovereign debt crisis. Amid calls from the IIF, which represents around 450 private sector lenders, for a fund worth at least €940 billion, ECB and eurozone officials continue to insist that the agreed smaller fund worth around €800 billion is enough. Unsurprisingly this has pushed EUR lower with GBP/EUR moving past 1.2120 and EUR/USD falling below 1.3100.
Concerns over Spanish growth prospects and debt levels look set to push peripheral yields higher this morning. Looking at spreads against bunds does overstate the divergence as bund yields continue to fall in light of a modest flight to quality. Spanish 5-year yields are at 4.725% in early trading, reaching a high least seen in early January. At their peak, yields rose above 6.3% in November 2011 so we have some way to go before we are back at levels signaling that markets have effectively shut. But eurozone leaders desperately need to start explaining how they will boost growth in the single currency area as a way to convince markets that debt-to-GDP ratios can be brought under control.
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