Italian and Spanish yields continue to rise. This was a problem a few months ago and with all the news about the European recession and Spain’s troubles with its undercapitalized banks, contagion is back in the news. This probably had a lot to do with the fall in stocks around the world yesterday.
Also affecting the auctions of new debt for Spain and Italy this week, especially Spain is the problem that was hailed as a solution at the beginning of the year. That was the loaning of money by the European Central Bank to any bank that was interested in low rates. Many banks took that money and bought government bonds in their own countries, bringing down the interest rates on those bonds which many were happy about. But it also got the banks deeper into holding government bonds in countries that are having trouble, partly because Spain for instance needs to bail out its banks. You can see the circular nature of this silliness which people are just now focusing on.
Rates on Italian and especially Spanish debt at are at problem levels again, up sharply again this week. We’ll see what the European summit on Thursday-Friday brings in the way of news.