Eurozone Bond Spreads Blowing Out

Here is a great chart from yesterday's Financial Times highlighting the growing credit crisis in the euro zone. The bottom left graph clearly demonstrates how credit spreads have blown out over the last few months. As investors turn their attention to the next dominoes to fall, Spanish bond yields have risen to approximately 300bps wide of German yields. Even more concerning is that Italian bond yields have blown out to 210bps wide of German yields (the highest spread since the euro came into effect). While Ireland and Spain both entered the credit crisis with very low government debt to GDP ratios (less than 30% for Ireland and less than 50% for Spain), the FT reports that Italy's sovereign debt to GDP will be about 118% by year end. On the positive front, Italy's banks remain far healthier than those in Ireland and Spain, though the country faces significant refinancing risk in 2011, with Eur300bn of total debt (sovereign plus bank) maturing during the year. Out of this 300bn, approximately 1/3 of it is due in the first three months. While equity markets continue to rally in the US, investors ought not to dismiss the contagion risks spreading throughout Europe.