No sooner had markets adapted to the possibility that Italy has become the new Greece than some observers are pointing out that maybe France is becoming the new Italy. Bespoke Investment Group noted that the spread between German and French bonds – that is, the rising difference between the yields on their respective 10-year bonds – has been rising sharply.
While the spread was a relatively narrow 30 basis points (or 0.3 percentage points) until the start of the summer, it has since taken off, rising to 145 basis points – a gain of 53 basis points in the past two weeks alone. In other words, markets are growing fearful that French government bonds (despite France's top-notch credit rating, for now) are far more risky than German government bonds.
"At this point, the spreads between France and German debt are nowhere near the spreads between Italian and German debt, but the direction and the velocity is alarming," Bespoke said on its blog. "As this debt contagion spreads across Europe, you can only hope that policymakers in Washington are watching, and can come to some agreement on how to prevent it from coming here."
There isn't much optimism out there – especially when it comes to responses from policy makers. Indeed, a number of commentators are growing more concerned that the responses so far have been either ill-timed or wrong-headed. As a result, the survival of the euro is now no-sure thing.
Here's Paul Krugman weighing in in his New York Times blog: "I believe that the [European Central Bank]rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn't raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.
"I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what's needed to avoid that failure. Irresistible force, meet immovable object – and watch the explosion."