Matthew Lynn Matthew Lynn

The eurozone crisis is back

The European Central Bank, Frankfurt a.M. (Credit: Getty images)

Stock markets are crashing. Bond yields are soaring. And the cryptos are evaporating. There is so much going on in the financial markets right now it would be hard to miss the most significant event. The eurozone crisis, which almost broke apart the single currency back in 2011 and 2012, is back. And this time around, there is no very obvious way of fixing it.

With inflation soaring across the world, the era of plentiful printed money coming to an end and interest rates starting to rise, every kind of financial market is in turmoil. Investors are adjusting to a new set of circumstances, and doing so very quickly. So far, only a few traders who spend their days glued to Bloomberg terminals have paid very much attention. But, within the chaos, yields on peripheral sovereign debt, the trigger for the single currency’s meltdown a decade ago, are rising steeply again.

Perhaps most worrying of all, the European Central Bank has no real way of fixing this

At the start of this year, the yield on a ten year Italian bond was just 1.25 per cent. Now it stands at 4.04 per cent and is going up every day. Just last week it was only at 3.3 per cent, a dramatic increase by the standards of the bond market. The yield has already climbed to its highest level in years and is accelerating towards the 6.7 per cent it reached at the height of the last crisis when there were widespread fears Italy would default. Likewise, the yield on a ten year Greek debt has doubled over the past few weeks, punching through 4.4 per cent, and getting dangerously close to the levels that came close to forcing the country out of the currency zone.

The trouble is, rising interest rates make all that debt a lot more expensive to service.

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