Were the markets bamboozled by the Euro? November 15, 2011 at 6:28 am
This picture is from Pictet (via the ever helpful FT alphaville):
Alphaville’s question is, given this, was Union sensible? I think it clearly was; on a weighted average spread basis, the EZ countries are still doing better than they were prior to the Euro, and even if they weren’t, those eight or nine years of low spreads were worth having (or at least they would have been if the money had been spent sensibly). In any event, what interests me more is why spreads were so low for so long. It seems to me that there are three (not necessarily mutually exclusive) possibilities:
- Despite having thousands of smart people looking at these things, the markets were wrong about what the bond spreads of Eurozone countries should be. They have now woken up.
- The markets have over-reacted to current events, and spreads are now well above where ‘fundamentals’ would suggest they ‘should be’ (whatever that means).
- The markets are right, and the spread changes have been in response to new information, specifically the discovery that leading EZ politicans are unwilling or unable to backstop the periphery.
I’m not sure where I come out on this yet…