Wednesday, August 3, 2011

The Euromess as of August 3

Paul Krugman sees “the whole eurozone … coming apart at the seams” (here) as investors fly from Italian and Spanish bonds, while Italy and Spain are too big to be “saved”, the Greek, Portuguese and Irish way, that is by North European taxpayers. 

According to the Financial Times, yields on benchmark 10-year Spanish and Italian bonds reach 6.45 and 6.25 respectively. The premiums paid to borrow over Germany reach euro-era highs of 404 and 384 basis points (391 points in the latter case according to Bloomberg today). These yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs. The premium on France’s bonds also reaches a euro-era high of 75 basis points.

Meanwhile the Swiss Franc approaches parity with the Euro and also gains vis-à-vis the US dollar, a clear sign of global financial worry. Today's interest rate cut by the Swiss monetary authorities is intended to check (efficiently) that rise but does not suppress the underlying cause.

The mounting crisis reflects the basic impossibility for southern European economies to avoid default on their debts with an overvalued euro while at the same time their governments aggravate the already severe recessions by deflationary macroeconomic policies (“austerity”) that stifle growth even more and thus further deteriorate public finances and increase (not decrease) the debt/GDP ratio. There is no way out in this direction. Partial default and currency depreciations – either of the euro and/or of newly re-created national currencies - are prerequisites for a return to growth. 

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