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In regards to the rising yields in ‘core’ Europe (German, Finland, etc.) Goldman’s Francesco Garzarelli and Huw Pill explain…For the same set of reasons, as the ‘end game’ approaches the rally in AAA-rated Euro area sovereign bonds (Germany’s especially) no longer seems sustainable and could reverse in coming weeks. In our base case of more intrusive control on future deficit financing, the core countries will, in exchange, have to shoulder a greater part of the legacy credit risk of their peers if they want to keep EMU alive. In a ‘break-up’ scenario, the creditor ‘core’ countries will be confronted with a wave of insolvencies, which would also worsen their fiscal position. And in the middle ground between these two outcomes, where we currently stand, the ECB will be intermediating growing intra-Eurosystem imbalances. Through this monetary channel at the heart of EMU, the ‘shadow’ credit risk of the core countries is already rising, and at an increasingly rapid pace.
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