The Eurozone: On the Edge of Crisis

Feb 14, 2017 | 09:15 GMT
The Eurozone: On the Edge of Crisis
The bailout of Banca Monte Dei Paschi di Siena, Italy's third-largest bank, was the first to take place after the eurozone instituted its "bail-in" rules. But those rules' apparent failure adds another layer of risk for the currency union.

As they look at the turbulence ahead in 2017, European policymakers are watching the eurozone's bond market with concern. A selloff in government bonds, following the trend worldwide, is adding stress to its already vulnerable economies, especially in Southern Europe. Officials' concerns are magnified by the uneven pace of the eurozone selloff, which is more rapid for bonds from some members than for others. The resulting spread (differences in yield) between French and German bonds, for example, has reached levels not seen since 2012, when a sovereign debt crisis nearly brought the currency union crashing down. That debt crisis exposed the existence of a "doom loop" created by the tendency by European banks to hold their home government's debt. The vicious circle of the doom loop could start with markets losing faith in a government's ability to pay back debt, precipitating a selloff of its bonds. The resulting drop in bond...

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