Euro Seesaws on Bond Spread Plan

For those of  us who spent Sunday doing something other than reading financial news, German magazine Der Spiegel ran an unsourced story claiming that the European Central Bank (ECB) planned to propose setting a yield cap on eurozone bond spreads over German bunds. For Spain, Italy or Greece, where spreads are approaching 4% on two-year bills, a cap of, say, 3% would tamp down interest payments and actually give the debt-plagued countries a little breathing room. German two-year yields are around 1.5% today. The Spiegel story also said that the ECB would have unlimited authority to buy sovereign debt.

Not going to happen, according to a spokesman for the German finance ministry, who said he was unaware of any plans to target bond spreads and that Germany’s central bank does not support such a plan. Spanish and Italian bonds, which had been falling following Spiegel’s story, have turned higher again. Spain’s two-year bond yields, for example, fell from about 3.82% early this morning to about 3.34% and have now risen back to 3.48% following the German government’s statement.

Anyone who is surprised by this has not been paying attention. Germany has no interest in committing itself either to a (very large) fixed contribution to a eurozone stability fund, nor does it want to give the ECB authority to buy sovereigns, especially if the bond yields are tied to the German bunds.

Germany’s Constitutional Court is due to rule next month on whether the German government is allowed by its constitution to contribute to the eurozone’s stability mechanism fund. Germany is not likely to do anything more until that ruling is in — and there’s at least an even chance that the court will rule against the contributions. Then the Germans will have to go to Plan J — or is it Plan K?

Paul Ausick