Europe’s bond bubble: Don’t go potty on the periphery

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Europe’s bond bubble


Southern Europe’s economies are in worse shape than tumbling bond yields suggest

INVESTORS have developed a remarkable enthusiasm for the European debt they once shunned. On April 10th, only two years after Greece imposed the biggest debt-restructuring in history on its private creditors, it raised €3 billion ($4.1 billion) in five-year bonds at a yield of less than 5%; the issue was seven times oversubscribed. On April 15th yields on ten-year Italian-government bonds fell to 3.11%, the lowest on record. From Portugal to Ireland, investors are piling into the bonds of the euro zone’s peripheral economies, pushing nominal yields down to levels not seen since the single currency began.
It is tempting to say that this is proof that the euro crisis is over: that years of tough reform are paying off, and that lower bond yields should soon lead to greater investment and faster growth. Tempting, but largely wrong. The outlook is far less rosy than the plunge in bond yields …

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