European Bond Yields
It is a fascinating picture (h/t Frances Wooley at WCI):
Frances asks "what were they thinking?" It seems clear enough that with the introduction of the Euro, bond traders came to view the debt of several European sovereigns as very close substitutes--a perception that seems to have vanished since the beginning of the financial crisis.
The better question, as Frances points out, is why were they thinking that? Actually, the "they" in this question should probably be replaced with a more uncomfortable "we." Yes, what were we thinking--if we were thinking anything at all. (If you were thinking otherwise, I presume you were holding significant short positions throughout the episode?)
I remember what I was thinking when I was teaching my section on International Monetary Systems years ago. After discussing the benefits of a common currency (or multilateral fixed exchange rate agreement), I'd turn to the evidence and discuss why the experiment seems to have worked in some cases and not others. A recurring theme for success appeared to be (among other things) some notion of "fiscal coordination" among potentially disparate regions of the union. I came to view this conclusion as a "duh, kinda obvious" sort of lesson that any future monetary union would surely respect and deal with accordingly.
Oops. So maybe I was being unduly naive in this respect. But is it reasonable to suppose that agents managing large bond portfolios were equally naive?
Anyway, if you have an interesting take on the picture above, please comment below.
In the meantime, you may be interested in this piece by my colleagues Fernando Martin and Chris Waller: Sovereign Debt: A Modern Greek Tragedy, and by my colleague Silvio Contessi: An Application of Conventional Sovereign Debt Sustainability Analysis to the Current Debt Crisis.
And here's a piece by Ferguson and Roubini in Der Spiegel: This Time, Europe Really is on the Brink.
Interesting times...
Frances asks "what were they thinking?" It seems clear enough that with the introduction of the Euro, bond traders came to view the debt of several European sovereigns as very close substitutes--a perception that seems to have vanished since the beginning of the financial crisis.
The better question, as Frances points out, is why were they thinking that? Actually, the "they" in this question should probably be replaced with a more uncomfortable "we." Yes, what were we thinking--if we were thinking anything at all. (If you were thinking otherwise, I presume you were holding significant short positions throughout the episode?)
I remember what I was thinking when I was teaching my section on International Monetary Systems years ago. After discussing the benefits of a common currency (or multilateral fixed exchange rate agreement), I'd turn to the evidence and discuss why the experiment seems to have worked in some cases and not others. A recurring theme for success appeared to be (among other things) some notion of "fiscal coordination" among potentially disparate regions of the union. I came to view this conclusion as a "duh, kinda obvious" sort of lesson that any future monetary union would surely respect and deal with accordingly.
Oops. So maybe I was being unduly naive in this respect. But is it reasonable to suppose that agents managing large bond portfolios were equally naive?
Anyway, if you have an interesting take on the picture above, please comment below.
In the meantime, you may be interested in this piece by my colleagues Fernando Martin and Chris Waller: Sovereign Debt: A Modern Greek Tragedy, and by my colleague Silvio Contessi: An Application of Conventional Sovereign Debt Sustainability Analysis to the Current Debt Crisis.
And here's a piece by Ferguson and Roubini in Der Spiegel: This Time, Europe Really is on the Brink.
Interesting times...
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