Changes of leadership in both Greece and Italy were initially well-received by markets, but investors are getting nervous again. Attention is shifting to France, and French government bonds seem to be on the nose. The chart below shows the “spread” between French and German 5-year government bonds. Measured in basis points (1/100th of 1%), the spread is the difference between the yields on the respective bonds and it has now reached 183 basis points.
Given that yields on 5-year government bonds are only 0.95%, that is a big difference. Investors are demanding almost double the rate of interest on a French bond offered by a German bond if they are to take on the risk that France is not able to repay its debt in 5 years’ time.
Unlike France, the United Kingdom is lucky enough to have its own currency and the spread between UK and German government bonds is only 10 basis points. More on that in a future post.
Data source: Bloomberg.
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Stubborn,
Clear explanation, as usual.
Just let me indulge in a little masochistic thing: could you post equivalent data, for Italian, Greek and/or Spanish 5-year bonds?
You know, to have some idea how far we are to THAT point?
Will do!
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Europe is engaged in a process that is familiar to many.
Should we get another credit card to tide us over while we learn from the mistakes made using our existing cards?
We know that we should spend more wisely, not run up charges on fripperies and only put on credit things that are worthwhile, but we fear that if we don’t pay today the bills that were in today’s mail box the electricity might get cut off or we will be unable to drive to work when the car breaks down.
The Germans just want to make sure that the spendthrifts get the fright of their lives before relenting and agreeing to upgrade the Eurozone to EuroCard Platinum issued by the ECB.
Thus lots of talk about how a EuroCard Platinum is against the law, will encourage bad behaviour, may cause inflation etc.
All of this may be true but even the Germans will not resist the growing howls for EuroCard Platinum for much longer, particularly if a condition of using the EuroCard may involve regular visits and helpful advice (and directives) on small details like retirement ages, employment conditions and taxation policies.
Plus the reward points will be fantastic !