Thursday, January 12, 2012

More improvement in eurozone financial markets

As a follow-up to yesterday's post, I note that euro basis swaps and swap spreads continue to improve, and in rather convincing fashion. Liquidity conditions in the Eurozone financial markets are improving, and although this doesn't necessarily lessen the risk that one or more sovereign defaults will occur, it means that the impact of any eventual defaults will be less severe than markets had come to fear. As liquidity returns, the risk of catastrophic defaults or financial meltdowns has declined measurably.

Not surprisingly, Spain and Italy today had successful bond auctions that resulted in a significant decline in yields. With the exception of Greece, where 2-yr yields have soared to 170%, 2-yr yields in Portugal, Ireland, Italy and Spain haven't been this low for many months; Irish yields are back down to levels not seen since last February. With improved liquidity comes improved confidence, and with improved confidence, markets can function more normally and economic growth is less likely to suffer. All very positive developments.

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