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Eurozone Crisis contagion spreading to the core

Crisis contagion spreading to the core
Reuters Nov 15, 2011 – 8:25 AM ET | Last Updated: Nov 15, 2011 8:27 AM ET

LONDON — Contagion from the eurozone debt crisis spread on Tuesday with top-rated issuers’ premiums over safe-haven Germany hitting new highs and Italian government bond yields again topping 7%, a financing level seen as unsustainable.

Italian 10-year yields rose more than 30 basis points, despite the appointment of former EU Commissioner Mario Monti to head a new government in Italy and with the European Central Bank active in the secondary bond market.

Spanish 10-year yields hit 6.3% on worries the bloc’s fourth largest economy could be sucked deeper into the crisis and before it launches a new 10-year bond on Thursday.

But the stress was not limited to the periphery. The yield spread of French, Austrian and Belgian 10-year bonds over German Bunds marked euro-era highs, while the equivalent Dutch spread hit levels not seen since early 2009.

“The fact that Holland and Austria are moving out — countries which were seen as cohorts of Germany in the past — is a worrying development,” said Nick Stamenkovic, rate strategist at RIA Capital Markets.

“Investors are looking to Germany given the worries not just about Italy and Spain but about the future of Europe as a whole.”

Adding to fears over the future of the eurozone, German Chancellor Angela Merkel’s Christian Democrats rubber-stamped a non-binding resolution on Monday which states that eurozone members can choose to leave the bloc if they are incapable of meeting its fiscal guidelines.

“The term “EMU exit” is now out there as a concept,” said ING rate strategist Padhraic Garvey.

Many analysts believe the only option to stem the contagion for now is for the ECB to buy large amounts of bonds without sterilising their purchases — effectively the same quantitative easing undertake by the U.S. and UK central banks.

However, the ECB, while continuing its bond purchases, has repeatedly said it is up to individual governments to put their fiscal houses in order.

“Everything is under pressure now, the market is clearly in the mood to force the ECB to take more action,” one trader said.

With the ECB the main buyer of Italian bonds, liquidity in the market has dried up, reflected in a bid/offer spread on 10-year bonds of around 100 cents.

Spain paid a high interest rate to issue just over 3 billion euros of 12- and 18-month T-bills on Tuesday and Belgian yields also rose.

http://business.financialpost.com/2011/11/15/crisis-contagion-spreading-to-the-
core/

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