SINCE GERMANY FIRST proposed a permanent replacement for the European Financial Stability Facility just over two months ago, the eurozone government bond market has been in a state of flux. Sovereign bond investors have been spooked by a largely German-led initiative to create a debt resolution mechanism that will make private creditors bear some of the costs of any bailout of a sovereign state within the eurozone.
Although bond markets already knew that many of Europe’s peripheral sovereigns had debt burdens verging on the unsustainable, the prospect of mandatory debt restructuring or, at the very least, an exchange of haircuts for financial assistance, has been the catalyst for a worrying rise in bond yields across the eurozone, creating a momentum of its own in the push and pull of debt sustainability. It has prompted calls for the EFSF to be increased from its €440 billion limit to meet emergency funding...
