Terminal and spreading: Europe now facing most serious crisis since World War II

   

November 15, 2011 – MADRID – Yields on Spanish debt rose above 6 percent on Tuesday after Spain sold 3.16 billion euros ($ 4.8 billion) of 12-month and 18-month Treasury bonds at higher yields than in previous auctions. Italian government bond yields climbed back towards 7 percent and even non-German triple-A rated issuers saw premiums over safe-haven Bunds mark new highs on Tuesday as a change of government in Italy failed to ease the euro zone debt crisis. Despite the appointment of former EU Commissioner Mario Monti to head a new government in Italy, Italian bond yields were around 19 basis points higher at 6.94 percent, reflecting the huge challenges facing not just Rome, but all euro zone policymakers struggling to solve the crisis. Ben May, European economist at Capital Economics in London, expects the debt mess in Italy, for instance, to last “as long as two decades” until the government there gets its debt to GDP ratio below the 100 percent benchmark. “Unless the rest of the euro-zone provides Italy with significant amount of assistance over a prolonged period, we think Italy will eventually default with catastrophic consequences for the wider region,” May said in a note. Austrian 10-year bond yields are also at euro-era highs versus Bunds, while the equivalent Dutch spread was at its most since early 2009. “The fact that Holland and Austria are moving out, countries which were seen as cohorts of Germany in the past, is a worrying development,” said Nick Stamenkovic, rate strategist at RIA Capital Markets. “Investors are looking to Germany given the worries not just about Italy and Spain but about the future of Europe as a whole.” Spain will first test the market with the sale of up to 3.4 billion Euros of 12- and 18-month T-bills on Tuesday ahead of Thursday’s bond auction. “Basically we’re back to square one against a firm risk-off underpinning,” said ING rate strategist Padhraic Garvey. “So far the markets suggest the odds of a positive outcome are quite poor… It is vital that we see speed at a political level in both Italy and Greece in terms of setting administrations in gear.” Markets also want to know details of how the firepower of the region’s rescue fund will be boosted with fears that Italy, which has to refinance 200 billion Euros of debt by the end of April, is too big to be bailed out. “Contagion is spreading — and very quickly, and unless the European Central Bank  come in and buy bonds on an unsterilized basis, which there is no sign of them doing, then it’s hard to see it stopping,” a trader said. –CNBC  CNBC