|

Eurozone yield spreads blow out, it's another crisis for Greece and Italy

Once again, the ECB has a crisis on its hands as 10-year bond rates in peripheral Europe widen relative to Germany.

Average Bond Interest Rates Through April from Europa, May 2022 is the current yield on 2022-06-06

ECB policymakers will ask Lagarde to be tough on fragmentation

Widening spreads have the ECB alarmed. The Bloomberg article ECB Policymakers Will Ask Lagarde to Be Tough on Fragmentation is what inspired this post. 

European Central Bank policymakers will this week ask President Christine Lagarde to use stronger language to signal that fragmentation won’t be allowed to happen and the borrowing costs of more vulnerable countries like Italy and Spain will be contained, according to people familiar with the matter.

Lagarde has said many times the central bank won’t allow financial conditions across the euro area to diverge significantly and is ready to do whatever is needed to avoid it.

10-year sovereign bond spread over Germany 

10-Year Sovereign Bond Spread Over Germany Mish Calculation

Eurozone 10-year sovereign bond yields long term 

Long Term Average Bond Interest Rates Through April from Europa Through April 2022

The big myth

The big Eurozone myth is that all Eurozone sovereign debt has no risk. If it did, and that myth lasted for years, the yield on all Eurozone sovereign bonds would be the same.

In 2015, when Greece 10-year bonds exploded to nearly 30 percent, then ECB president Mario Draghi (now Italy's Prime Minister) gave a speech announcing "We will do whatever it takes to save the Euro, and believe me it will be enough." 

After the announcement yield spreads plunged. 

Q: What did Draghi do?
A: Nothing!

Seriously, the ECB did nothing. The threat alone was somehow sufficient. Draghi restored faith in peripheral debt.

Lagarde has said many times the central bank won’t allow financial conditions across the euro area to diverge significantly and is ready to do whatever is needed to avoid it.

The Eurozone gets another test doesn't it?

Fundamental flaw 

The Euro itself is fundamentally flawed. 

There is no one interest rate policy that makes sense for Greece, Spain, Italy, and Germany.

The sovereign debt risk is not the same and anyone with an ounce of common sense understands that.

Quantitative tightening?

To control spreads this time, I suspect the ECB will have to buy every bond of Greece, Spain, Italy, and Portugal.

That is not compatible with Quantitative Tightening or rising yields.

What a hoot

For the second time ECB presidents have to come to the rescue of Greece, Spain, Italy, and Portugal. 

I am positive that another "We will do whatever it takes" announcement without doing anything will NOT suffice. 

Controlling spreads is going to be damn hard to pull off with the ECB's interest rate at -0.50 percent and rising and quantitative tightening allegedly in the works.

Another Eurozone sovereign debt crisis is brewing and few see it.

Biden plans to pay down national debt, tackle inflation

Meanwhile, back in the USA, my June 3 "Hoot of the Day" was Biden Plans to Pay Down National Debt, Tackle Inflation

End of the 40-year bull in debt and a “global depression” threat

The bull market in bonds is over, and with that Danielle DiMartino Booth see a “Global Depression” Threat.

Author

Mike “Mish” Shedlock's

Mike “Mish” Shedlock's

Sitka Pacific Capital Management,Llc

More from Mike “Mish” Shedlock's
Share:

Markets move fast. We move first.

Orange Juice Newsletter brings you expert driven insights - not headlines. Every day on your inbox.

By subscribing you agree to our Terms and conditions.

Editor's Picks

EUR/USD eases from around 1.1800 after US GDP figures

The US Dollar is finding some near-term demand after the release of the US Q3 GDP. According to the report, the economy expanded at an annualized rate of 4.3% in the three months to September, well above the 3.3% forecast by market analysts.

GBP/USD retreats below 1.3500 on modest USD recovery

GBP/USD retreats from session highs and trades slightly below 1.3500 in the second half of the day on Tuesday. The US Dollar stages a rebound following the better-than-expected Q3 growth data, limiting the pair's upside ahead of the Christmas break.

Gold to challenge fresh record highs

Gold prices soared to $4,497 early on Monday, as persistent US Dollar weakness and thinned holiday trading exacerbated the bullish run. The bright metal eases following the release of an upbeat US Q3 GDP reading, as USD finds near-term demand in the American session.

Crypto Today: Bitcoin, Ethereum, XRP decline as risk-off sentiment escalates

Bitcoin remains under pressure, trading above the $87,000 support at the time of writing on Tuesday. Selling pressure has continued to weigh on the broader cryptocurrency market since Monday, triggering declines across altcoins, including Ethereum and Ripple.

Ten questions that matter going into 2026

2026 may be less about a neat “base case” and more about a regime shift—the market can reprice what matters most (growth, inflation, fiscal, geopolitics, concentration). The biggest trap is false comfort: the same trades can look defensive… right up until they become crowded.

Dogecoin ticks lower as low Open Interest, funding rate weigh on buyers

Dogecoin extends its decline as risk-off sentiment dominates across the crypto market. DOGE’s derivatives market remains weak amid suppressed futures Open Interest and perpetual funding rate.