Eurozone crisis watch

Today’s Italian bond auction went significantly better than expected, although nervous market watchers still found a reason to worry, as reported on the Guardian’s excellent Eurozone Crisis Live Blog:

At first glance, the results are slightly better than feared (the yields on the three and 10-year bonds are lower than the record highs recorded last month).

But, Italy only sold a total of €7.017bn of debt, out of a maximum target of €8.5bn. That’s worrying, when the country needs to auction around €440bn of debt in 2012.

And a yield of almost 7% is still unsustainable over a long period.

Yes, 7% is unsustainable over a long period, but, if the Europeans muddle through this as I expect they will, the threat of unsustainable debt will force Italy and other European governments to run large budget surpluses to pay down the debt when their economies are in better shape (i.e. probably not before 2014-15).  The challenge of course will be that at the same time they will face large budgetary pressures from ageing populations. I expect this will force European governments to make some very painful decisions on social welfare spending, because they simply won’t have any alternative.

By the way, the Economist has a handy guide to understanding the sustainability of debt here:

Debt dynamics: The maths behind the madness

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