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Rising Government Bond Yields Push Eurozone Debt Crisis to the Precipice of Collapse

Interest-Rates / Global Debt Crisis Nov 18, 2011 - 06:58 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleDavid Zeiler writes: Rising government bond rates are making it increasingly costly for several key Eurozone nations to borrow money, stoking fears that the sovereign debt crisis has reached a critical stage.

Yields on 10-year Spanish Treasury bonds rose to 6.8% during yesterday's (Thursday's) auction - uncomfortably close to the 7% level at which many experts feel is unsustainable. When the 10-year bond yields of Portugal, Ireland, and Greece passed 7%, each was forced to seek a bailout.


Just last week the 10-year bond yields of Italy crossed the 7% threshold. Though yields dropped back below 7% after Italian Prime Minister Silvio Berlusconi stepped down, the respite proved short-lived. The Italian 10-year bond yield fell back to 6.84% yesterday but is expected to stay in the danger zone for the foreseeable future.

Perhaps more worrisome is the rise in French bond yields. While France is not one of the troubled PIIGS (Portugal, Ireland, Italy Greece and Spain), it has deep financial ties to those nations. French 10-year bonds now yield 3.64%, twice that of equivalent German bunds despite both nations having a top-tier AAA credit rating.

The cost of borrowing is rising even for nations that until now had been outside of the fray, like the Netherlands, Finland, and Austria.

"Momentum is building," Louise Cooper, market strategist at BGC Partners, told MarketWatch. "Ten-year French borrowing costs are now around [two percentage points] greater than Germany, Spanish borrowing costs are rocketing and 10-year Italian debt is yielding over 7%. The hurricane is approaching. Time to batten down the hatches."

Economic Damage
As the Eurozone debt crisis deepens, many analysts worry that the rising government bond rates could put the brakes on lending and lead to a credit crunch such as the one experienced during the 2008 financial crisis.

In the short term, however, the steady stream of scary news is taking a toll on the stock markets. The British FTSE 100 was down 1.58% and the French CAC 40 was down 1.78% yesterday, while the Dow Jones Industrial Average fell 134.79 points, or 1.13%.

"Investors keep thinking that the powers that be in Europe are getting in front of this - only to be disappointed when additional bad news emerges," observed Money Morning Capital Waves Strategist Shah Gilani. "That's why we're seeing these whipsaw trading patterns that are so frustrating to retail investors who've been schooled to buy and hold. The reality is that this will get much worse before it gets better."

Increasingly noisy squabbling between Eurozone leaders France and Germany over how much of a role the European Central Bank (ECB) should play in addressing the crisis has added to the pessimistic mood.

France believes the ECB should step up its purchase of government bonds to drive rates back down to more manageable levels, but has not been able to convince Germany to go along.

"If politicians believe the ECB can solve the problem of the euro's weakness, then they're trying to convince themselves of something that won't happen," German Chancellor Angela Merkel said in a speech in Berlin yesterday.

The ECB, for its part, has expressed reluctance about doing more. ECB President Mario Draghi said earlier this month that becoming the lender of last resort for the Eurozone's troubled members was outside of its purview.

No Way Out
The ECB's policy of buying just enough government debt to avert a meltdown has only extended the crisis.

"It keeps contagion intact not just for the peripherals but also for the core countries and increases the pressure on the ECB to do something," Nick Stamenkovic, a bond strategist at RIA Capital Markets, told Reuters. "Clearly at the moment the ECB is reluctant to do anything."

Gilani said that having the ECB buy more government debt is a futile exercise, as all the ECB's money has to come from the Eurozone nations.

"There is no way out other than the European Union growing its way out while eliminating waste, cutting spending -- but not too deeply -- and collecting taxes from tax dodgers," Gilani said. "Good luck with all that."

Indeed, with economies slowing, growing out of the debt crisis appears unlikely.

Economic growth in the Eurozone slowed to 0.2% in the third quarter, a trend expected to last well into 2012.

"The economic slump will accelerate in the coming months," Christope Weil, an economist at Commerzbank told the Associated Press. "The uncertainty caused by the sovereign debt crisis is lying like mildew upon the Eurozone economy."

With no solution in sight, the Eurozone debt crisis will continue to tumble closer to financial disaster. The rise in government bond rates is just the latest signpost on that dark road.

"Think of the shriek sound of rapidly rising rates as poor canaries gasping for air in the depths of a poisoned coal mine and hopefully you can get out - or at least hold your breath for a very long time," Gilani said.

Source :http://moneymorning.com/2011/11/18/rising-...

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