Okay, the U.S. isn’t going to default and its credit rating isn’t going to be downgraded, at least for a while. But, as Roseanne Roseannadanna used to say, “it’s always something.” The something this time is what’s happening in Spain and Italy:
Spanish and Italian politicians rushed to formulate a fresh response to the debt crisis engulfing their two countries as their borrowing costs hit new euro-era highs on Tuesday. José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, delayed a planned summer holiday amid growing fears Madrid could become the latest European government to require a bail-out. In Rome, finance minister Giulio Tremonti and regulators convened an emergency session of Italy’s Financial Stability Committee. While the committee expressed confidence in the Italian banking system, Mr Tremonti is due to meet Jean-Claude Juncker, head of the group of eurozone finance ministers, in Luxembourg on Wednesday to discuss the burgeoning crisis.
The flurry of activity came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 per cent and 6.25 per cent, respectively. The premiums Madrid and Rome pay to borrow over Germany also reached new euro-era highs of 404 and 384 basis points. Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs. [My emphasis]
Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading. “What can be announced to really break that? It is difficult to see,” said Laurent Fransolet, head of European fixed income research at Barclays Capital.
The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy. It has been heightened by worries about the possibility of recessions in the US and Europe, which has led to frenzied buying of perceived safe-haven debt including Germany, the US and the UK.
German 10-year yields dipped below the domestic rate of inflation briefly on Tuesday, for the first time since at least 1960. Britain’s benchmark borrowing costs, as measured by 10-year gilt yields, fell to lows not seen since 1946. US 10-year yields hit new year-lows of 2.65 per cent.
So we’re back in familiar territory. A very worrisome territory.