It is easy to get the impression that the naysayers are wrong about Europe. After all of the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France (which is retreating into old-fashioned socialism) was able to borrow at about 2%, and one of the best-performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear, when one stands back from all the usual euro-rhetoric, that, as a threat to the global financial system, it is a case of “panic over.”
Well, no. The decline in government bond yields for the troubled nations in the Eurozone was and still is a reflection of the ability of the European Central Bank (ECB) to manipulate markets and expectations. There has been some behind-the-scenes help from the Fed, which has helped foreign banks, mostly European, to the tune of over $700 billion of easy money since 2009.
The ECB has basically managed to talk yields down, and here it had some unexpected and temporary luck from Japan. Since Japan declared a policy of printing huge amounts of yen to get the currency down, global hot money was given a seemingly guaranteed profit by borrowing depreciating yen at negligible cost, buying euros, and investing in Eurozone debt. Since the introduction of Japan’s new monetary policy, Eurozone debt yields took a shift down, spreading happiness and joy to beleaguered Eurozone governments. That honeymoon was short-lived, as the fallacies behind Abenomics dawned on markets, and Japan’s latest export became monetary and financial instability.
Thanks to BrotherJohnF