AS THE August 2nd deadline for a resolution of America’s debt-ceiling row approaches, other news is being drowned out. America’s debt debacle provokes rubber-necking fascination but the euro crisis is still the bigger threat to financial stability.
The chances (admittedly diminishing with time) are that America will get its house in order and avoid default; and that a ratings downgrade will happen but not threaten the pre-eminence of Treasuries as the world’s safe asset of choice. In contrast, the euro area’s crisis is already in full swing and policymakers, as this week’s issue of The Economist makes plain, have not found a way to stop it.
The chart alongside shows movements in bond spreads over German Bunds since the July 21st summit in Brussels for the five euro-area economies most in the limelight (setting tiny Cyprus to one side). The three economies to have been bailed out already—Greece, Ireland and Portugal—have seen spreads drop on the promise of lower interest rates and longer debt maturities.
But the spreads for Italy and Spain, both far bigger economies, continued to go up this week. Spain’s sovereign-debt rating was put on negative review by Moody’s this morning. Adding to the uncertainty, José Luis Rodríguez Zapatero, the prime minister, today announced an early election, to take place in November.
Italy sold €8 billion ($11.4 billion) of ten-year bonds on July 28th but had to pay a yield of 5.77% to do so, the highest level at auction for 11 years. Making matters worse, European politicans have gone back to making unsettling comments after their brief show of discipline at the summit: Wolfgang Schäuble, Germany’s finance minister, said this week that he would not be writing any blank cheques to the euro area’s bail-out fund, the size of which is inadequate to ringfence Spain and Italy.
This week also saw the release of the first annual report of America’s Financial Stability Oversight Council (FSOC), a regulatory body that was set up by the Dodd-Frank act to monitor systemic risks to the country’s financial system. It has little to say about the risk of a self-harming government, but for a report that is supposed to identify threats to America, its main effect is to underline the vulnerability of Europe’s banking system.
America’s banking industry remains much less concentrated than Europe’s, and the size of the largest banks relative to GDP is lower, too. American banks have raised capital assiduously over the past two years as many European ones have dithered. American money-market funds are big funders of European banks, notably in the core countries; asset outflows from these funds may be prompted by worries over the American debt ceiling but will have an impact across the Atlantic.
The political impasse in Washington, DC, will be the big story of the coming days. Given enough dogmatism and stupidity, it might be an enormous financial one, too. But the bigger cause for concern lies in Europe.
Source: www.economist.com
The chances (admittedly diminishing with time) are that America will get its house in order and avoid default; and that a ratings downgrade will happen but not threaten the pre-eminence of Treasuries as the world’s safe asset of choice. In contrast, the euro area’s crisis is already in full swing and policymakers, as this week’s issue of The Economist makes plain, have not found a way to stop it.
The chart alongside shows movements in bond spreads over German Bunds since the July 21st summit in Brussels for the five euro-area economies most in the limelight (setting tiny Cyprus to one side). The three economies to have been bailed out already—Greece, Ireland and Portugal—have seen spreads drop on the promise of lower interest rates and longer debt maturities.
But the spreads for Italy and Spain, both far bigger economies, continued to go up this week. Spain’s sovereign-debt rating was put on negative review by Moody’s this morning. Adding to the uncertainty, José Luis Rodríguez Zapatero, the prime minister, today announced an early election, to take place in November.
Italy sold €8 billion ($11.4 billion) of ten-year bonds on July 28th but had to pay a yield of 5.77% to do so, the highest level at auction for 11 years. Making matters worse, European politicans have gone back to making unsettling comments after their brief show of discipline at the summit: Wolfgang Schäuble, Germany’s finance minister, said this week that he would not be writing any blank cheques to the euro area’s bail-out fund, the size of which is inadequate to ringfence Spain and Italy.
This week also saw the release of the first annual report of America’s Financial Stability Oversight Council (FSOC), a regulatory body that was set up by the Dodd-Frank act to monitor systemic risks to the country’s financial system. It has little to say about the risk of a self-harming government, but for a report that is supposed to identify threats to America, its main effect is to underline the vulnerability of Europe’s banking system.
America’s banking industry remains much less concentrated than Europe’s, and the size of the largest banks relative to GDP is lower, too. American banks have raised capital assiduously over the past two years as many European ones have dithered. American money-market funds are big funders of European banks, notably in the core countries; asset outflows from these funds may be prompted by worries over the American debt ceiling but will have an impact across the Atlantic.
The political impasse in Washington, DC, will be the big story of the coming days. Given enough dogmatism and stupidity, it might be an enormous financial one, too. But the bigger cause for concern lies in Europe.
Source: www.economist.com
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