We noted earlier that Spanish bonds have been the worst performer in the euro zone this past month, followed by Italy.
The two spreads to Germany are now higher than they were during the April-May panic regarding Greece. What is even more astounding is that Spain and Italy spreads are now the highest since 1996-1997. In other words, markets now view Italy and Spain as less credit-worthy than they were when they formally adopted the euro in 1999. Greece and Portugal spreads had already eclipsed pre-euro levels, and so Italy and Spain are simply joining them and illustrating how the lines of contagion from Greece continue to gather pace.
In fact, if you take out the huge spike in yields for the periphery in late April/early May as an outlier due to panic, one sees that these spreads are simply continuing the steady widening trend in place for most of the year.
This despite pledges from Greece, Portugal, Spain, and even Italy to tighten fiscal policies. And who knows where the spreads would be if the ECB weren't buying. Sure, the amounts purchased so far seem small, but the fact of the matter is that the ECB is now the buyer of last resort. Most of its purchases have reportedly been Greek bonds, but the spreading contagion suggests that the buying program will have to be quickly expanded to Spain and Italy too.
Let's not forget Sam Spade's warnings from last year which seems increasingly apt:
Has leaving a monetary union ever been carried out before, in an electronic banking system?
If there is any hint of a Eurozone state leaving the Euro, there would be so much capital flight the economy would be crippled for decades.
The more likely answer is that "said country" gets kicked out if it blows up (because other countries will probably follow). Or Germany/France will vleave voluntarily. The key point - will Germany/France prop all these countries up if one or two blows up (meaning others will follow)? My bet is that they will try to but eventually realize they'll be taken down if they do.
