Will the eurozone break up? This chart will tell you

Could the eurozone crisis blow the single currency apart?

There’s a lot of horse-trading now going on amongst Europe’s finest on how to fix the problem.

But all those rumours and counter rumours are becoming very confusing. So lets cut to the chase.

Any workable bailout plan for the eurozone’s bust countries and banks – and indeed, for the ‘zone itself – will hinge on market confidence. The French are needed to back whatever plan is finally hatched.

So France simply must keep its AAA credit rating. As the FT says, “a French downgrade could lead to a collapse of the EU’s financial rescue system”.

But can France keep its credit score? Let’s see what the markets are saying.

The yield on a country’s bonds shows how confident investors are that they’ll repay their debts. The lower the yield, the more investors are willing to lend.

This chart shows the gap between French and German five-year bond yields. The higher the red line climbs, the more France is having to pay compared to Germany to borrow. That’s a key measure of confidence in the country, and by extension, the eurozone – and it’s clearly collapsing fast.

French and German five-year sovereign bond-yield spread

Source: Bloomberg

So don’t believe what people are saying about the chances of a EU bailout working. The markets are giving the clearest message of all.

The chart is telling us that the eurozone has never been in more danger. In fact, it really could be on the verge of breaking apart.

We’ll be keeping a very close eye on this chart, and posting regular updates. Watch this space!

Category: Economics

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