German-France bond spread, Italian yields reach record

3rd November 2011, Comments 0 comments

The gap between German and French sovereign borrowing rates widened to a record on Thursday and the 10-year cost of borrowing for Italy reached a record briefly above 6.402 percent.

The Germany-France spread on 10-year borrowing rates, a critical pressure point in the eurozone, widened to 1.358 percentage points and the Italian rate, which eased to 6.319 percent, puts Italy borrowing costs close to unsustainable levels.

Germany and France are the economic and political pillars of the eurozone, and France which trails Germany in economic performance is anxious to hold on to its top AAA credit rating.

A widening of the spread between German and French rates is a sign of tension at the heart of the eurozone.

In recent days, funds have moved into buying German debt as a defence in times of great uncertainty over the eurozone and Greek debt crises.

Meanwhile, the price of French bonds has eased, pushing up the fixed rate on French bonds as a percentage of the new price. This has widened the gap or spread.

The immediate critical pressure point in the eurozone is the borrowing rate indicated for Italy as funds move out of Italian bonds, pushing up the fixed yield.

The shock decision by Greece to hold a referendum on a complex eurozone-Greek debt package has raised openly the possibility that Greece might leave the eurozone, or might be forced into a disorderly default on its debt payments.

This has raised a range of uncertainties on financial markets, for example about the ability of many European banks to absorb any repercussions from a Greek default if it occurred. This has therefore refocused attention on the debt of other countries in the eurozone considered to be weak.

Countries already being rescued alongside Greece are Ireland and Portugal, but the main concerns are Italy, with the third-biggest economy in the eurozone and a huge debt mountain, and Spain.

The European Central Bank has been supporting the weaker countries, by buying their debt from banks and financial companies and also by providing finance on a regular basis to prop up banking systems.

© 2011 AFP

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