Europe has yet to allay investor scepticism about the sustainability of the region's debt, and any spread of the crisis would cloud global economic prospects, the International Monetary Fund's number three official said.
"At least for now it looks like the spillover from the European sovereign crisis to areas outside of the region will be limited," Naoyuki Shinohara, deputy managing director at the IMF, said in an interview in Tokyo yesterday.
"However, if the European sovereign debt problems were to become bigger, we need to keep in mind that that could bring about considerable downside risks."
European officials have indicated they're ready to expand their efforts to contain the crisis that erupted last year and has so far led to bailout packages for Greece and Ireland. German Chancellor Angela Merkel this week expressed willingness to take whatever steps are needed to stem the turmoil.
The extra yield investors demand to hold Greece and Ireland bonds rather than German bunds "still remain very high, despite the rescue packages," Shinohara said. "That means that scepticism over the sustainability of their debt in the market hasn't been cleared away."
The extra yield investors demand to hold 10-year Spanish government bonds rather than German bunds touched a record 298 basis points on November 30th compared with an average of 15 basis points over the first decade of the monetary union. The spread was 233 basis points after Spain yesterday sold €3 billion of bonds in its first debt auction of the year.
"The steps that the European Union officials can announce in terms of increasing the fund's size that they have to help the peripheral countries can still take a few weeks to happen," said Mansoor Mohi-uddin, Singapore-based head of global currency strategy at UBS. "I'd rather still be a seller of the euro on the rallies."
Bloomberg