Europe has reached a “make or break moment”, said Greece’s prime minister George Papandreou. This week yields on Spanish and Italian ten-year bonds hit euro-era highs above 6% as prices tanked. Fears of a Greek default saw its two-year debt yield eclipse 39%.
What the commentators said
This is the “most dangerous time for the global economy” since Lehman’s collapsed, said Allister Heath in City AM. Eurozone leaders’ foot-dragging over Greece’s second rescue package has focused markets’ attention on other states vulnerable to a debt crisis: Spain and Italy. “A vicious circle is operating,” said The Times. “The more anxious investors become about the political will… to take decisive action, the more borrowing costs for these countries rise.”
Italian and Spanish bond yields are fast approaching 7%, “the point of no return”, said Nicola Marinelli of King Asset Management. Once Greek, Portuguese and Irish bond yields reach that point, the bond market will no longer fund these countries. Italy is too big for the eurozone to bail out. That raises the spectre of default, a banking crisis and an ensuing credit crunch. The same could occur if Greece or another peripheral country gives up on austerity or if some Greek debt is written off as part of a rescue deal.
With contagion spreading, the end of monetary union in its current form is a distinct possibility. Putting an end to contagion requires a comprehensive plan that tackles not only Greece, but also Spain and Italy, said Capital Economics.
The overall choice is between “fiscal union or break-up”, said David Bloom of HSBC. Widely-touted ideas, such as a common European bond and greatly expanding the euro-wide rescue fund – the European Financial Stability Facility – would represent moves towards the former.
However, they could ultimately be stymied by Germany and other northern Europeans “firmly opposed to any solution that could imply open-ended transfers to feckless southerners”, said The Economist. In the end, said Ambrose Evans-Pritchard in The Daily Telegraph, it’s up to Germany. Does Germany “really want to pay the costs of monetary union any longer?”