Anorak News | So Where Are All The Bond Vigilantes? Doubling Rates For the Italians

So Where Are All The Bond Vigilantes? Doubling Rates For the Italians

by | 25th, November 2011

WHERE are all the Bond vigilantes? Not buying Italian debt is the short answer.

Italy paid a record 6.5 percent to borrow money over six months Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome’s new emergency government.

The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.

Well, OK, OK, they managed to sell them so there were buyers: but with bonds, the fewer buyers there are the higher the interest rate you’ve got to offer to attract them. That’s what is happening here.

But the important lesson to take away from this isn’t that Italian interest costs are rising. It’s not even that on 10 year bonds they have to pay 8% now. The really important thing to see here is how damn quickly it all happens. The markets, those bond vigilantes, just by deciding not to buy at the old prices (no, this is nothing to do with speculation, short sellers, derivatives of CDS, it’s just people refusing to buy the Italians’ bonds because they’re worried they won’t get paid back) have doubled interest rates in a month.

That’s a lesson for us here in the UK too. Rather than a rant about how Tories are wonderful and Labour pissed all the money away, think seriously for a moment about how quickly those markets are working. Yes, we know that UK debt isn’t costing us much in interest at the moment. Yes, we probably could borrow more and thus not make the cuts we are.

But, as we’re seeing, we can continue to do this until we can’t and the “we can’t” comes at some unknowable point but when it does come it comes fast. Leading to much worse results through panicked and immediate cuts than through planned and sensible ones (OK, yes, it’s a Tory government so we won’t get that last either but….).

It’s even possible that a borrow and grow our way out of it policy could have worked (I don’t think it could have but apparently sensible people think it could have) but what this Italian mess is showing us is that there is a limit to that policy as well. And when you hit the buffers, you hit them hard, and it hurts.

Posted: 25th, November 2011 | In: Money Comments (2) | TrackBack | Permalink