Do you remember the eurozone sovereign debt crisis?
I was reminded at a meeting with an economist the other evening that these potentially serious and contagious events only took place a few months ago.
It feels like many investors have moved past the crisis to some extent, looking ahead to other economic factors such as the UK government comprehensive spending review.
Earlier this month, the spreads on longer-term Greek government debt surged back to crisis levels of around 8%. This implies a high risk of default – something that could trigger other financial problems particularly in southern Europe.
Ted Scott, Director of Strategy at F&C, published a note this week looking at the state of play in Eurozone government bond markets.
Within the note he looks at the current situation in the eurozone along with the current state of play in countries labelled the PIIGS – Portugal, Italy, Ireland, Greece and Spain.
Scott says that following the European Central Bank’s €750bn bailout package in May, a measure of control has been achieved. This is evidenced by the slowing need for the European Central Bank to purchase bonds.
However, even though yields on the bonds issued by these countries are now below the peak levels they reached in June, they are still in many cases at record spreads over the safe-haven German bunds.
Bund yields (along with UK and US government bond yields) have fallen on the back of fears of deflation and a double-dip recession.
Ted Scott goes on to say: “The fact that spreads have widened to the German bund is paradoxical because the German economy has been growing much faster than any analyst had forecast,”
“It was believed that confidence and growth would be dragged down by the negative effect of the sovereign debt crisis. However, in the second quarter, German GDP rose by 3.7%.”
Whilst, as Ted Scott points out, a measure of control has been regained, the problem has not gone away. Investors should not be too surprised if the eurozone sovereign debt crisis comes back for a second, more aggressive, round in the future.
