The Eurozone's problem spreads - Financial Markets Outlook
08/19/2008Since the outbreak of the financial turmoil, Eurozone government yields spreads vis-à-vis the German Bund have widened significantly. Spreads almost returned to pre-EMU levels.
While many argue that this simply reflects a flight-to-liquidity, we think there is more to it. Economic fundamentals have clearly taken centre stage. Markets are discerning between "good and evil".
Markets are distinguishing between high-debt Eurozone countries and the rest. While the former suffer from the global appraisal of risk and are assessed according to their credit ratings, spreads of the latter are mainly determined by the economic outlook.
The financial turmoil has been the trigger for a new era of more market discrimination. It might be that the low spreads of the 2003-06 period were rather a reflection of poor German macroeconomics than of perfect market integration.
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