24th July 2012
The cycle is becoming familiar: Eurozone government bond yields rise, equity markets fall, European politicians devise a policy response, bond yields fall, equity markets rise and then there is a new trigger for bond yields to start rising again. Yesterday, markets found themselves once again at the start of that cycle, as Spanish bond yields rose to 7.5%. But this time, Eurozone policymakers may find that the decision no longer rests in their hands.
"Spanish government bonds have fallen to their lowest levels since the euro was created. This pushed the yield (effectively the interest rate) on its 10-year bonds to a new record high of 7.513% – further into the zone where borrowing costs are unsustainable."
This time the selloff was triggered by fears that Spain's autonomous regions are in trouble and need financial help. It is thought that this would imperil Prime Minister Mariano Rajoy's efforts to battle the Spanish economic crisis.
The natural assumption from here is that Eurozone policymakers will step in to address the problem. They will come up with a new funding scheme to bail out whichever part of the beleaguered Spanish/Greek/Italian economy requires extra funding. But what if they were no longer master of their own destiny?
This additional wrinkle has been introduced by rumours that the IMF wants to halt its aid to Greece. "The patience of the International Monetary Fund (IMF) with Greece comes to an end: According to information obtained by SPIEGEL, senior IMF officials told EU leaders in Brussels that the IMF was no longer willing to provide additional funds for Greece."