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Eurozone sovereign debt default gets closer

New evidence of problems in the global economy emerge almost every day now from somewhere in the world – figures from the UK service sector today were much worse than expected by economists, many of whom seem to be pretty rubbish at predicting figures these days.


But EU politicians are not prepared to even accept the scale of the Euro problem, let alone take sufficient and robust action to address it and there have further sharp falls yesterday in equities around the world, with the FTSE 100 closing 3.58% down.

Sharp falls in equity markets are usually good for gilt prices and so it was today, pushing yields down close to last month’s lows, with the five year gilt yield falling 0.12% to 1.17% and the 10 year falling even further, by 0.16% to 2.29%. Five year swaps fell to 1.74%, just one basis point, 0.01%, above the all time low hit last month.

Greek bonds passed a new milestone today, with the yield on its two-year bonds rising to 50.4%. I hate to think how much a fixed rate mortgage in Greece must cost these days.

The yield on 10 year Italian bonds rose by 0.27% to 5.59%, providing an insight of what might be happening in the UK if Ed Balls had become chancellor.

Just over a month ago the European Central Bank managed to buy enough Italian 10 year bonds to push their yield down from over 6% to under 5% but today’s sharp rise in the yield, culminating over two weeks of an increase in the yield every single day, suggests that the ECB has either run out of firepower or decided to stop throwing good money after bad.

Either way it suggests that that the markets will very soon force the hand of Eurozone politicians, in much the same way as when they did the UK a favour in September 1992 by forcing us to escape from the ERM. I hope Greece and some of the other Eurozone countries have got their old currencies stored safely away, with a rapid distribution plan ready to be put into action.

Despite record low gilt yields allowing UK borrowers to benefit from record low fixed rate mortgages, the main worry now is just how bad the banking crisis resulting from the impending Eurozone Sovereign debt default will be.

It will be a major challenge for politicians, central banks and regulators to contain the contagion when Greece defaults. Unfortunately their track record in 2007/8 doesn’t exactly inspire confidence.

Despite Eurozone politicians appearing to be economically illiterate when it comes to addressing the fundamental flaws of the Euro experiment we must hope the relatively slow burn of the Euro crisis, plus the lessons learnt from the collapse of Northern Rock, Bradford & Bingley and Lehmans, among others, have enabled the various interested parties to put in hand adequate measures to deal with the fall out. I just wish I was confident about that.


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