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Debt spreads hit euro launch levels

Fissures are widening in the eurozone despite the announcement of a £643 billion stabilisation package only a few weeks ago.

Last week the yields on many eurozone countries’ debt exceeded the levels before the package was announced on May 10. The spreads between German debt and those of some other eurozone nations also hit their highest levels since the euro’s launch in 1999.

Spanish and Italian debt was worst affected. But even France, generally seen as a core member of the eurozone, saw yields on its debt widening against German bunds.

Several factors were blamed for investors’ rising aversion to southern European debt. Foremost was probably growing doubts about the stabilisation package. Although the package was agreed in principle, many details are missing and it still has to be ap proved by eurozone member states.

Yet at the same time tensions are emerging between Germany and many other countries. Germany is insisting on strict fiscal discipline, whereas several other states prefer a less harsh line on public spending.

Vincenzo Albano, a fixed income analyst at Reuters Insider, says: “The market turbulence is going to continue until there is more clarity on the bail-out package.” He says those countries with the laxest fiscal discipline are likely to suffer most in the markets.

Azad Zangana, the European economist at Schroders, says: “What we are seeing is a re-evaluation of risk within the bond markets.”
Spain has suffered additionally as a result of losing its AAA status from Fitch as well as fears it may be forced to nationalise some of its banks.

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