Is Europe’s monetary union in danger? Over the past year, the bond market has become increasingly concerned about the creditworthiness of some of the euro’s members. The gap in yields between the benchmark German bunds and the sovereign debt of Spain, Greece, Ireland, Italy and Portugal has quadrupled since July to the highest level since the single currency’s launch in 1999. The yield on Greek bonds is 2.3% higher than that on German paper; the spread is now ten times higher than a year ago, as the perceived default risk has risen. Debt ratings agency Standard & Poor’s has now warned Greece, Ireland, Spain and Portugal that it could downgrade their national debt, highlighting the rise in borrowing due to the weakness in their economies and “how serious economic tensions within the currency zone could become”, says Matthew Curtin in The Wall Street Journal.
In Spain, where a debt-fuelled housing bubble has now collapsed, S&P expects a doubling of the budget deficit this year. Europe’s bond supply is expected to jump by 15% in 2009, says Ambrose Evans-Pritchard in The Daily Telegraph. Eurozone governments can spend and drive up debt to counter downturns, but individual countries can’t lower interest rates or let their currencies take the strain, so there is a risk of a backlash against the straitjacket of monetary union among the population as the pain mounts. “We are going to see fresh talk about the sustainability of monetary union and it is going to get messy,” says Michael Klawitter of Dresdner Kleinwort. No wonder the euro has come under pressure of late.