On one side of the Atlantic, markets are making the eurozone riskier than it needs to be. On the other, they are treating the US as less risky than it is.
Italy is the latest European pressure-point. The country’s credit default spread, measured by Markit, has risen by 92 per cent since the beginning of May. At 281 basis points on Monday morning, it was catching up with Spain (340 bps). Germany is at 45 bps.
That development makes little sense. For at least a decade, politicians of both left and right have yielded to the technocrats at the Italian Treasury. That should continue, with or without strong growth. The country’s debt level is much too high at 119 per cent of gross domestic product, but it is set to stabilise next year.
Bears worry about Italy’s banks– but there is little evidence of an impending crisis in a nation that did not have a property bubble. Investors’ most reasonable fear is of their own irrationality. A sovereign debt buyers’ strike would create a funding crisis, however much austerity the government introduces.
Meanwhile, the US CDS spread is only 51 bps. Admittedly, this is an odd instrument, since few sellers could be relied on to pay out if the US really went belly-up. But the low level, which has risen only 18 per cent since early May, hardly reflects the increased risk of an actual default, the fiscal deficit of 9.3 per cent of GDP, or bipartisan fiscal indiscipline. If Italy was as messed up as the US, its CDS spread would probably look more like Portugal’s (1090 bps).
Why the different treatment? Investors can remember the pre-euro world and can easily imagine eurozone defaults and break-up. But they cannot really conceive of a financial world not built on US debt. That lack of imagination is dangerous. Market pressure has helped eurozone nations, including Italy, to act responsibly. Investors’ insouciance is allowing the US to flirt with disaster.
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