ECB: Markets right to fear periphery debt

Tim Wallace
Follow Tim
INVESTORS were right to charge periphery governments a higher rate of interest on their debts, European Central Bank (ECB) analysts said yesterday, countering previous claims from ECB officials and EU politicians.

Before the financial crash borrowing costs across Eurozone governments converged at low levels.

But following the crash and particularly in 2011, interest rates spiked for governments like Greece and Spain, threatening their ability to finance budget deficits and leading to criticism of the markets.

But new ECB research indicates the investors were right to identify different risks in different countries.

“While financial markets tended to price sovereign risk within a region, in particular within the Eurozone, in a similar way, irrespective of differences across countries’ fundamentals, they started to discriminate on the basis of fundamentals more strongly during the crisis,” said the report.

“Most of the increase in the price of sovereign risk during the 2008-11 sovereign debt crisis among euro area countries that experienced tensions in the sovereign bond market, and other euro area countries, was due to a deterioration in countries’ fundamentals and fundamentals contagion.”