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"I believe this is important for those who buy government bonds: that we make it clear that we want more Europe, step by step..."

Angela Merkel, 10th November 2011

We are increasingly concerned by the growing political impasse in Europe which threatens to unravel the Eurozone. Germany’s refusal to contemplate allowing the European Central Bank to act as a lender of last resort and its demand for closer fiscal integration have exposed the absence of sufficient financial firepower to deal with the sovereign debt crisis. Hopes that Eurozone leaders had acknowledged the degree of market stress by agreeing plans to boost the resources of the European Financial Stability Facility to €1 trillion have rapidly faded. Fixed income markets greeted the outcome of the November European Union summit with scepticism. Yields have continued to rise, with additional upward pressure from banks selling bond holdings to meet stiffer capital requirements. Ten-year government bonds in Italy and Spain are trading back up towards the 7 per cent level, and now even France appears to be suffering a contagion effect. (...)

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