All eyes on Europe's 7 percent yields

Fri Nov 18, 2011 9:09am EST
 
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By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters)- In some cultures, the number 7 is mystical and magical; in the euro zone, it's a Mayday call.

Yields on the bonds of two of the currency bloc's largest economies -- Italy and Spain -- were either at or within a whisker of 7 percent in the past week, creating huge concern about future funding and prompting a selloff in riskier assets.

Widely considered the level at which funding costs become too high to be sustainable, extended periods of 7 percent yields have previously prompted bailouts for Ireland and Portugal.

Italy and Spain are too big for this, particularly combined, so it is almost certain that the coming week will be dominated by investors watching to see whether this can reverse or at least be contained.

Weekly bond-buying data from the European Central Bank, released on Monday, will give some idea of how much the authorities had to fight to keep yields just where they were.

The European Commission also publishes its consultation paper on common euro zone bond issuance, something Germany strongly objects to.

With the end-of-month deadline approaching for the euro zone to produce firm plans for leveraging the EFSF bailout fund, markets will also be keenly watching central bank officials and bloc finance ministers.

The point for financial markets is that after months or worrying about whether contagion will take hold from Greece and other smaller countries' debt problem, it already has done.   Continued...