The US Federal Reserve chairman “has just rained on what could have been Europe’s big parade”, says Nick Hastings on WSJ.com. His intention to end quantitiative easing, the money-printing programme that has been providing global liquidity for years, has caused a fall in European government bond prices and hence a rise in yields. Spain and Italy’s ten-year bond yields have gained a whole percentage point since early May.
Before Bernanke’s move buyers had returned to European bond markets. They had been enticed by global liquidity and the European Central Bank’s promise last summer to buy unlimited quantities of peripheral bonds if the crisis flared up again. As yields – long-term interest rates – fell, the European downturn eased: the latest manufacturing and services surveys suggested that the worst was over, while consumer confidence has crept up to a 22-month high.
So “the last thing Europe needs is higher interest rates… when economies are still fragile”, says Christopher Iggo of Axa Investment Managers. Yet that’s what it’s likely to get now that the feel-good factor fuelled by global liquidity is dissipating.
Investors will also notice that Europe hasn’t used the breathing space since last summer’s panic to get its act together, says Richard Barley in The Wall Street Journal. “[Structural] reform is stalling… and fiscal pressures remain intense.” Italy’s second-biggest bank, Mediobanca, has warned privately that the spike in borrowing costs will trigger a bail-out, reports Ambrose Evans-Pritchard in The Daily Telegraph. There are also other reasons to fret.
The Greek governing coalition has just lost one of its three members, and while an immediate election is not on the cards, more potential political instability is a new headache for investors – especially as Greece’s rescue package may well have to be renegotiated if it is ever going to get on top of its debt burden. Spain, Portugal and Cyprus also “remain on an unsustainable path”, says Wolfgang Munchau in the Financial Times.
Then there’s Europe’s banking union. The idea was to transfer banking supervision to the European Central Bank and recapitalise Europe’s zombie banks. That would bolster investor confidence by ending the scope for government finances to be damaged by bust banking sectors. But a mere €60bn has been put aside for direct recapitalisation. “So far, the eurozone appears to be just diluting” the government/bank loop rather than breaking it, says Lex in the FT. There is, concludes Munchau, “quite a bit of bad news still to come out of the eurozone”.