Stock markets are crashing. Bond yields skyrocket. And crypto is evaporating. There is so much going on in the financial markets right now that it would be hard to miss the biggest event. The eurozone crisis, which nearly broke the single currency in 2011 and 2012, is back. And this time, there is no very obvious way to fix it.
With inflation skyrocketing around the world, the era of abundant printed money coming to an end, and interest rates beginning to rise, every type of financial market is in crisis. Investors are adjusting to a new set of circumstances, and they are doing so very quickly. So far, only a few traders who spend their days glued to Bloomberg terminals have paid much attention. But, within the chaos, yields on peripheral sovereign debt, the trigger for the single currency’s collapse a decade ago, are rising sharply again.
Perhaps most worrying of all, the European Central Bank has no real way to fix this problem.
Earlier this year, the yield on a 10-year Italian bond was just 1.25 percent. It now stands at 4.04 percent and is rising every day. Last week it was just 3.3 percent, a spectacular rise by bond market standards. The yield has already risen to its highest level in years and is accelerating towards the 6.7 percent it reached at the height of the last crisis when there were widespread fears that Italy would default. Similarly, the yield on Greek 10-year debt has doubled in recent weeks, reaching 4.4 percent and coming dangerously close to the levels that nearly forced the country out of the currency zone.
The problem is that rising interest rates make servicing that debt much more expensive. And these, let’s remember, are some of the most indebted countries in the world, and they owe much more than last time. Italy’s debt-to-GDP ratio has risen to an alarming 148 percent of GDP, and Greece’s to 186 percent.
It’s the exact same challenge as a decade ago, except this time on roller skates. And, perhaps most worrying of all, the European Central Bank (ECB) has no real way to fix it. At the height of the latest crisis, its then president Mario Draghi, who is now Italy’s prime minister, threw all treaties aside and started printing money. That meant he could buy all the bonds issued by the peripheral countries and bring the markets to heel. But this time? It is not so simple. The ECB cannot print money without stoking inflation. But if you don’t print extra euros, you may have to admit that Italy and Greece, and perhaps also France, on second thought, are bankrupt. In reality, the euro remains as dysfunctional a monetary system as ever, and inflation, a novelty for the currency, is about to test it to its limits.
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