The breakdown of the European financial market continues as Spain and France are reported to be on the brink of joining the economic crisis. This is in addition to rising fears in Italy, where even after the resignation of Silvio Berlusconi government bond yields have climbed over 7% amidst fears over the crisis. Spain and France have also seen a rise in bond yields, which experts believe are strong indicators that the two countries share a similar fate to their struggling neighbor.
Currently, ten year bonds in Spain have climbed to 6.3%, whereas French bonds are at 3.67%. Furthermore, the indexes tracking the French and Spanish markets have tumbled in recent weeks. As the crisis hits nation after nation, many financial experts are now calling for the European Central Bank (ECB) to act as a tourniquet to stop the endless financial bleeding.
Economists believe it will be highly unlikely another nation such as China will provide the requisite capital to bail out Europe. Consequently the ECB is the only available lender capable of purchasing sovereign debt. Without swift action, Spanish bonds may rise above 7%, which in turn may affect France. The interconnected nature of the European market has resulted in many investors predicting a domino effect unless the ECB takes actions similar to what the U.S. government did in 2008. At the time, the government bailed out a number of institutions to avoid financial meltdown. In Europe, however, many leaders are unwilling to even address the topic of a bailout given the stigma it has with the general public.
In fact, European governments are primarily focusing on austerity measures to deal with their fiscal problems. While a trimmed budget, revenue increases, and more responsible spending is the better long term strategy for reducing debt, the short term crisis is in need of more immediate action. Moreover, austerity measures may even exacerbate the problems by reducing growth and discouraging lending.
Nevertheless, the news in Europe is not entirely bad. Yields in Germany, the Netherlands, and Sweden are still relatively low. On the other hand, lack of a widespread sell-off may indicate that the activity in the Spanish and French bond market is not the product of investor panic, but rather the ability to deftly identify which European nations are in trouble. Unfortunately, the list of troubled nations is growing quickly. For instance, yield on Spanish debt was below 5% just this October. As of last week, French bond yields were less than at the start of the year.
The fear that the European banking crisis may begin to spread like a contagion is why many are calling for the ECB to act now. Without immediate action, the debt crisis may continue to spread throughout the continent, affecting the very foundation of the European economy.
Currently, ten year bonds in Spain have climbed to 6.3%, whereas French bonds are at 3.67%. Furthermore, the indexes tracking the French and Spanish markets have tumbled in recent weeks. As the crisis hits nation after nation, many financial experts are now calling for the European Central Bank (ECB) to act as a tourniquet to stop the endless financial bleeding.
Economists believe it will be highly unlikely another nation such as China will provide the requisite capital to bail out Europe. Consequently the ECB is the only available lender capable of purchasing sovereign debt. Without swift action, Spanish bonds may rise above 7%, which in turn may affect France. The interconnected nature of the European market has resulted in many investors predicting a domino effect unless the ECB takes actions similar to what the U.S. government did in 2008. At the time, the government bailed out a number of institutions to avoid financial meltdown. In Europe, however, many leaders are unwilling to even address the topic of a bailout given the stigma it has with the general public.
In fact, European governments are primarily focusing on austerity measures to deal with their fiscal problems. While a trimmed budget, revenue increases, and more responsible spending is the better long term strategy for reducing debt, the short term crisis is in need of more immediate action. Moreover, austerity measures may even exacerbate the problems by reducing growth and discouraging lending.
Nevertheless, the news in Europe is not entirely bad. Yields in Germany, the Netherlands, and Sweden are still relatively low. On the other hand, lack of a widespread sell-off may indicate that the activity in the Spanish and French bond market is not the product of investor panic, but rather the ability to deftly identify which European nations are in trouble. Unfortunately, the list of troubled nations is growing quickly. For instance, yield on Spanish debt was below 5% just this October. As of last week, French bond yields were less than at the start of the year.
The fear that the European banking crisis may begin to spread like a contagion is why many are calling for the ECB to act now. Without immediate action, the debt crisis may continue to spread throughout the continent, affecting the very foundation of the European economy.
