Widening spreads between German government bonds and those of Italy, Greece and other eurozone countries are a “wake-up call” for policymakers, Jean-Claude Trichet, the president of the European Central Bank, warned yesterday.
Mr Trichet urged European governments to heed warning signals from the region’s debt markets and “be very cautious as regards fiscal policies” as the gap between the yield on Italian government bonds and the benchmark 10-year German Bund opened up to its widest since the 1999 birth of the euro.
The growing gap between yields illustrates the extent to which the global credit turmoil is causing investors to demand higher risk premiums for holding bonds considered more risky and instead buy those of Germany – which has the region’s largest and most liquid market.
Mr Trichet’s comments indicate rising concern at the ECB and provide a stiff reminder to eurozone governments of the importance it attaches to fiscal consolidation – in spite of the deteriorating economic outlook.
However, Mr Trichet added that other factors might be at work in explaining recent movements, including liquidity issues and an “across-the-board” correction seen across all markets. That made it difficult to draw conclusions at this stage on the causes, he said. Market corrections were a “mark of the time”, he added.
Italy’s Treasury took some comfort in that the closing spread of 59.7 basis points between 10-year Italian and German bonds, the biggest gap since 1999, was overtaken by Greece yesterday, which widened to more than 60bp. Yields on bonds issued by most other eurozone governments, including Spain, the Netherlands and France also continued to widen against the Bund yesterday.
Italian officials said the “flight to quality” was affecting countries across the board, a view shared by traders and analysts.
The Italian finance ministry denied reports in Il Sole 24 Ore, a business daily, and the UK’s Daily Telegraph that it had intervened in debt markets on Tuesday to prevent a further surge in yields. It said the incorrect reports stemmed from a misunderstanding of a normal market bond exchange operation that was announced on Tuesday and is due to take place today.
