Just five days after a Euro zone summit reached an agreement on a second Greek bailout package, Spanish and Italian bond yields are back to the levels seen in the days before the deal was struck, indicating that the euro zone relief is already fading. German Bund future prices, the benchmark of the EU debt market, are also back up at pre-summit levels.
Spain and Italy paid a high price to sell short-term debt today, reflecting investors’ doubts that European policymakers had resolved a crisis. Spain’s short-term cost of borrowing hit three-year highs and demand fell at its Treasury bills auction while yields at a sale of six-month Italian paper hit their highest since November 2008.
“The most important point again is the fact that relative to the last auction yields are much, much higher,” said Marc Ostwald, a strategist at Monument Securities in London.
“It shows we may have had some relief last week but that relief has proven to be rather short-lived.”
Initial market enthusiasm for the deal saw the euro, peripheral euro zone bond prices, and shares rise. However, the relief rapidly faded as the focus turned to the difficulties in implementing aspects of the package and the fundamental problems of debt sustainability that have yet to be addressed.
“The package was viewed quite positively … Beyond that, it has run into problems over how to implement it. That has been a struggle,” Commerzbank rate strategist David Schnautz said.
Also it is uncertain yet how many banks will sign up to the bond exchanges or buybacks agreed to ease Greece’s debt burden, since this is to be done on a voluntary basis.
Top of analysts’ concerns is that the euro zone’s rescue fund, the European Financial Stability Facility, has not been given extra funds to draw upon despite being handed a much wider role.