Remember how Europe solved its debt crisis last week?
Posted by
Brian (aka trav007)
Oct 31 '11, 11:39
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Well, looks like they didn't.
OCTOBER 31, 2011, 10:37 A.M. ET
Italian Bonds Fall Sharply
The Wall Street Journal
By NEELABH CHATURVEDI
LONDON�Italian government bonds buckled Monday, with five-year yields climbing to euro-era highs and the 10-year yield rising above the psychologically important 6% level as the post-European Union summit enthusiasm in risky assets fizzled out.
The five-year Italian bond yield rose 0.25 percentage point to 5.97%, the highest level since the inception of the common currency.
The 10-year yield increased by 0.17 percentage point to 6.15%, rising further from Friday when an Italian bond sale received feeble demand.
The weakness in Italian government bonds also weighed on bonds issued by other highly indebted euro-zone countries, including Spain, despite traders citing buying by the European Central Bank.
Assets perceived to be safe, such as German bunds and U.K. gilts rose sharply, with near month futures contracts on both rising by a point each.
"Long term investors are liquidating their Italian holdings while the broad risk-off tone is also playing a part," said a senior London trader.
He added that the ECB had bought "quite a lot" of Italian bonds on Monday.
The 6% mark on the 10-year note is seen as crucial as the crisis in other fiscally frail euro-zone countries like Ireland and Portugal intensified after breaching that level.
Unless bond market participants can be emboldened to buy Italian and Spanish bonds, the euro-zone debt crisis may yet continue.
Italy and Spain are much larger economies than Greece, Ireland, and Portugal-all three of which had to seek external assistance�and should they suddenly find themselves unable to borrow at affordable rates, the EFSF's fire-fighting capabilities will be severely put to the test.
For instance, in Italy bond redemptions and coupon payments alone total �167 billion next year.
The sharp slide in Italian bond prices will worry policy makers, who had hoped that a series of measures announced at last week's European Union summit will help shore up sentiment.
European leaders were lauded for managing investor expectations in the run up to the summit last week.
However, the lack of clarity on how the firepower of euro zone's rescue fund�the European Financial Stability Facility�will be raised as well as a plan that will see investors write down the value of their Greek debt holdings, has made investors nervous
According to Richard McGuire, senior interest rate strategist at Rabobank, the crisis has moved from fundamentals of individual countries to a systemic one, whereby each country pursues a different fiscal policy but the ECB sets monetary policy for the entire region.
"Unless we see debt risk transferred to the weaker countries, either directly in the form of common issuance or indirectly in the form of guarantees, the crisis may continue," he said.
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