Eurozone crisis gets worse, not better

JUUGS Jun12.pngGlobal bond investors have found a new worry. 10 year interest rates in Spain, the world’s 12th largest economy, have risen alarmingly in recent weeks. As the chart shows, they are now above 7% (blue column) compared to 4% when the blog first focused on the Eurozone crisis (red).

7% is a critical level, as it marks the point at which countries can usually no longer support the burden of interest cost involved. During the current crisis, it has also marked the moment when countries such as Ireland and Portugal have had to receive a bail-out.

This is why the blog has continued to argue that there are sound reasons for the current record differentials between interest rates being paid by the PIIGS (Portugal, Ireland, Italy, Greece, Spain) and the JUUGS (Japan, UK, USA, Germany, Switzerland).

Interestingly, some major bond fund managers have recently begun to express similar views. Thus Jeffrey Rosenberg, chief fixed income investment strategist for Blackrock (who have $3.7tn under management), noted recently in respect of the low interest rates in the JUUGS:

“You’re not talking about a bubble because a bubble is about greed. That’s not a reflection of ‘I expect prices to go higher and I have to jump in,’ that’s a reflection of ‘I want to preserve my principal.’ Negative yields reflect fear.”

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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