European Sovereign Bond Crash?

November 16th, 2011
in econ_news

Econintersect: European bond yields continued to rise Tuesday as the market seems to have more and more doubts about the ability of EU countries, except for crashGermany, to service their sovereign debt.  Fallout from the dismal bond market is driving the euro lower and there is speculation now that it could go as low as $1.30 within a few days.

Often bonds and stocks trade is opposite directions, but in the current situation that might not happen.  Because of economic disruptions stocks and bonds could both decline together.  The pairing of declines for stocks with European bonds might not carry over to the U.S. where bond yields have been falling as European yields have risen.  If U.S. stocks are negatively affected stocks here could fall as Treasuries rise in price.

Follow up:

Here is a summary from Reuters:

The euro slipped to a fresh one-month low against the dollar and the yen on Wednesday as the euro zone debt crisis threatened to engulf top-rated members such as France, as government bonds of core countries came under pressure.

The common currency fell as far as $1.3460, its lowest level in more than a month, after the French bond yield spread over benchmark German bunds hit euro-era highs.

Italian yields shot back above the critical 7 percent level as the appointment of former EU Commissioner Mario Monti to head a new government failed to quell concerns over the country's long-term political and economic future.

Bloomberg reports that there are calls for action by the ECB (European Central Bank):

The ECB needs to “cut rates, now, and do something serious about helping governments, or the euro project is over,” Soeren Moerch, head of government-bond trading at Danske Bank A/S in Copenhagen, wrote in a note to clients today.

The central bank lowered its key interest rate a quarter point to 1.25 percent on Nov. 3. It raised borrowing costs by the same amount twice this year from a record-low 1 percent.

Economic woes in Europe would have an effect on the U.S. because about 20% of U.S. exports go the EU.  Here is a map from Ezra Klein (Washington Post) showing which states would be most affected by any reduction of exports to Europe:


The other factor of great concern is the impact on banks.  Elliott Morss (GEI Analysis) has shown the exposures of banks to European sovereign debt includes $ 181 billion to U.S. banks.  French banks have the largest exposure ($681 billion), Germany has $507 billion at risk and the UK $354 billion.

Sources:  Reuters, Bloomberg, Washington Post and GEI Analysis (Elliott Morss)

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