There are two main issues at stake in the European debt markets. The first is a short-term liquidity issue: Will these economically troubled European nations have the capital to make the next interest payments on their debts? The answer, for the time being, appears to be yes: Greece, after receiving massive funding infusions, has been able to continue making interest payments on its debts, although their principal values were drastically reduced during the first quarter.
The second, larger issue relates to the long-term structural problems, which have been largely unaddressed thus far. Europe is home to a variety of economies, each with its own set of challenges, whether a housing market bubble, an over-leveraged banking sector, or a workforce struggling to remain competitive. These economies no longer have as broad a set of policy tools to address their challenges, either through devaluing their currency or adapting monetary policy tailored to their particular circumstances. As it stands, the European Central Bank can only set a single policy for this diverse group of economies despite their different dynamics and different needs. Until that fundamental problem is addressed, we believe investors will likely continue to see waves of volatility from the European bond markets.
Read more in our quarterly Q&A.
More in: Fixed income, International