Is European Debt Refinancing Crisis Over?

The fact that even the most troubled and dysfunctional of the crisis countries, Greece, was able to sell long term securities with a yield of slightly less than 5% is a sign that the financing crisis of euro area countries is over-at least for now

The situation is even better for other troubled countries, with the yield gap being a few tenths of basis points for Spain, Italy and Ireland relative to the UK and US, and Portugal’s 10-year yield below 4%.

For the moment, the crisis seems to be over. What could resurrect it?

Well, the thing about debt panics is that they’re partially self-fulfilling prophecies. If most people wants to lend to someone, then they won’t have any trouble refinancing debt, regardless of how bad the fundamentals are. But if no one wants to lend to them, then even an institution with small debts will default on expiring debt securities.

So, as long as investors are optimistic no more debt refinancing crisis will arise. But since they could become pessimistic again it is possible that it could re-appear.

Most countries can shield themselves from it through the printing press-as long as they’re willing to ignore the inflationary consequences. Euro area countries can’t do that by themselves since the printing press has been outsourced to Frankfurt.

But if the ECB is willing to act towards national debts in the way that national central banks act towards their country’s debts then the crisis is clearly over.

That is good in the short-term, but not necessarily in the long term since it will weaken/remove the incentive to avoid deficit spending.


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