Warning over bond spreads in Europe

March 7 2008

Widening spreads between German government bonds and those of Italy, Greece and other eurozone countries are a "wake-up call" for policymakers, Jean-Claude Trichet, the president of the European Central Bank, warned yesterday.

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The growing gap between yields illustrates the extent to which the global credit turmoil is causing investors to demand higher risk premiums for holding bonds considered more risky and instead buy those of Germany - which has the region's largest and most liquid market.

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Italy's Treasury took some comfort in that the closing spread of 59.7 basis points between 10-year Italian and German bonds, the biggest gap since 1999, was overtaken by Greece yesterday, which widened to more than 60bp. Yields on bonds issued by most other eurozone governments, including Spain, the Netherlands and France, also continued to widen against the Bund yesterday.

[The idea that the euro could possibly replace the US dollar as the world's reserve currency] has been evaluated at some length across the markets and its adjunct professions with a unanimous conclusion on the lack of suitable merit for the candidacy.

It is fair to say that two main sources of objection are the European Central Bank (ECB) and the political system of Europe. On the former, while the ECB has been unique in its focus on inflation at the expense of economic stimuli, its actions belie its words - in effect, it can be proved that the primary source of inflation that may confront Europe in the next few months is the one created by the ECB itself. Things are worse on the political front. Be it the tax pursuits of Germany and Britain, political imbroglio of Spain and Italy or the circular logic loop of French reforms, there is no reason for hope across the Old continent.

His idea seems to be: Europeans are missing an opportunity to command the World economy ship, when so many players got wet. The problem is, there is no big sense to command a sinking ship, especially by jumping in to drive it the same sinking course. What's the use of being the last captain of this madness?!