Can Yields' spreads disintegrate the Eurozone?
Earlier on Wednesday, European bond yields decreased after the latest sharp increase as the European Central Bank held its unscheduled council meeting to discuss recent volatility.
Yields on Italian 10-years benchmark bonds fell 38 points to 3.87%, from above 4%, which was seen for the first time since 2014. In Germany, it was down 12 points to 1.63%. Even though this movement decreased the spread between the Italian and German benchmarks, it is still high and unbalancing the borrowing cost.
While that was always one of the European concerns, the Covid crisis also increased this unbalancing, as it hit the economies of Greece, Italy, and Portugal even harder.
After today's emergency meeting, ECB's Governing Council had a statement emphasizing that they will act against this risk that they called financial "fragmentation." However, they did not say what exactly they were going to do. They just said they would be more flexible for re-investing redemptions from its massive COVID-era bond-buying program to help better more indebted EU economies.
With increasing the risk over the Eurozone unity and its economic conditions, Euro lost the ground against its crosses, with more than 0.25% loss against the dollar to print new records under 1.04
As you can see in the bellow monthly figure, EURUSD under 1.05 has entered the critical area. With the current diversion between ECB and FED policies, and while the Eurozone economy is not performing well, it will be so hard for Euro to recover itself in the short term. In the longer term, by getting out of the current crisis, Euro can also find its way. However, it does not seem like an easy return.
