Bond Yields For All Eurozone Countries Were The Same Before The Lehman Bankruptcy

This is an interesting chart showing that all countries that adopted the Euro in 1999 paid the same interest rate on their bonds after 1999, the year the Euro was introduced. The spread between the different countries returned again after the Lehman Brothers bankruptcy in 2008.

eurozone countries yield long term difference

At the same time many of these countries had a high government debt-to-GDP ratio at that time. A risk that wasn’t priced in the interest rate. I can’t find a graph of these government debt-to-GDP ratio’s in 1999 sadly but this was the result at the end of the second quarter of 2012.

debt to gdp eurozone graphic

The miss pricing of the interest rate on bonds for some European countries by the capital markets is one of the causes of the Euro crisis where we are in today.

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2 thoughts on “Bond Yields For All Eurozone Countries Were The Same Before The Lehman Bankruptcy

  1. Evert

    Spain, Ireland and the Netherlands had low debt/GDP ratios (35,25,40) when Lehman collapsed. The credit bubble in these countries wasn’t in the public sector, but rather in the private sectors of banking, housing and construction. Italy already had a high debt/GDP ratio going in. So large government debts are not a direct consequence of low interest rates. Crucial is how they dealt with bursting bubbles in the private sector. Ireland decided to absorb it completely into the government finances; Spain pretended nothing was amiss until the sh*t really hit the fan. Those were voluntary government policy decisions that were in no way forced upon them by their creditors. The only government you can really accuse of splurging is the Greek.
    The ECB kept interest rates low in the euro’s first decade, because Germany, Italy and France had weak economic growth during most of that time. It should have hiked rates sooner and faster, but everyone takes better decisions with the benefit of hindsight. Now that the eurozone is in its longest recession ever, low interest rates is what’s keeping us solvent and thanks to Draghi’s “we’ll do whatever it takes” we all have them. The only remedy against a new bubble is that Draghi and eurozone governments are more vigilant when a recovery starts to take hold and take better decisions with the virtue of foresight. …in my humble opinion ;).

    Reply
    1. dobododo Post author

      Thanks for your comment Evert. You are right regarding the Debt-to-GDP ratio’s before Lehman and the reason that caused the high Debt-to-GDP ratio’s after Lehman.

      Reply

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