Mody A., (2014), “Europhoria once again- should we view the recent fall in spreads and yields as a sign of confidence or as another overreaction?” Bruegel Blog, 10 Φεβρουαρίου.
Europhoria was rampant in the euro’s first decade. Just before the onset of the crisis, the yields paid by the soon-to-be distressed Greek, Irish, and Portuguese sovereigns were almost indistinguishable from the yields paid by the German sovereign. Then it all flipped. At the height of the crisis, in mid-2011, the premium (risk spread) over German yields paid by the distressed sovereigns was above 10 percentage points, and the spreads paid by Spain and Italy threatened to run out of control until the September 2012. Since then, there has been another flip. Europhoria has returned. Spreads have compressed again. And while they are larger than just before the crisis, with interest rate levels generally lower, the yields paid are near historical lows.
One perspective is to blame myopic markets. Acting as a herd, market participants have been a source of instability. The Europhoria before the crisis was due to a collective failure to see the looming crisis. The reaction once the crisis started was over-the-top and risked pushing otherwise-solvent sovereigns into a self-fulfilling prophecy of distress. Should we then view the recent fall in spreads and yields as a sign of confidence, as some policymakers are doing, or as another overreaction?
An alternative perspective is that the markets get it right: they do not overreact, they merely respond to the incentives set by the policy framework. The pre-crisis yield compression was fostered by a widespread belief that, despite protestations to the contrary, private creditors would be protected. When growth plummeted and debt-ratios skyrocketed, the commitment to protect creditors was discounted, and risk premiums rose. But following a set of new policy initiatives, the commitment to bailout has been bolstered and markets have calmed down. Private creditors to sovereigns have, in effect, been promised that, barring exceptional circumstances, they have no reason to fear a default.
Σχετικές Αναρτήσεις:
- Nixon, S., (2014), “Europe Can Be Optimistic—in the Long Term”, The Wall Street Journal, 26 Ιανουαρίου.
- Hancké, Β., (2013), “Despite signs of recovery, the Eurozone crisis is still far from over”, European Politics and Policy Blog, 30 Οκτωβρίουο.
- Münchau, W., (2013), “Optimism about an end to the euro crisis is wrong”, The Financial Times, 27 Οκτωβρίου.