Eurozone Crisis May Be Over As Bond Yields Fall
It seems only yesterday that the eurozone crisis was in full flow.
The borrowing costs of 'peripheral' eurozone countries such as Ireland, Spain, Portugal, Italy and Greece shot to stratospheric levels as bond market investors bet on a possible break-up of the single currency or that some of these countries would be unable to finance their borrowing costs.
The turnaround has been nothing short of remarkable.
Yields of Spanish 10-year government bonds, which stood at 7.6% as recently as July 2012, fell below 3% recently - a level not seen since before the financial crisis erupted.
Now yields on Italian 10-year bonds have also fallen to less than 3% for the first time.
Other evidence of a recovery comes in the fact that Greece, not long ago written off as a basket case, last month raised 3bn euros from investors in its first auction of government bonds in four years. Demand was so strong that it could have raised 20bn euros.
So what is happening? Does it signify an end to the eurozone sovereign debt crisis?
Well, up to a point. It is certainly true to say that bond markets are less worried about the ability of eurozone economies to service their debts.
And it is also true to say that investors are not as convinced as they were about the prospect of the eurozone breaking up - as shown by the fact that the premium demanded by investors to hold the debt of 'peripheral' eurozone nations such as Spain instead of ultra-safe German government bonds has fallen sharply.
For instance, the premium demanded by investors to hold Spanish 10-year debt is now less than 1.5 percentage points, a level not seen since August 2010.
But what has driven this is not so much an end to the crisis as the fact that, with central banks such as the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England all keeping interest rates at ultra-low levels, investors around the world are desperate for a return on their money.
That has driven them into financial assets, like Spanish and Italian debt, that offer a better return than US Treasuries or German bunds.
The other crucial factor is that some investors are undoubtedly buying in anticipation of further emergency measures by the European Central Bank to stimulate demand.
They remember well the promise in July 2012 of Mario Draghi, the ECB's president, to do "whatever it takes" to keep the eurozone together.
With inflation plummeting across the eurozone - and with some countries, such as Spain, now experiencing outright deflation - they figure that moment may not be far away.
Should the ECB launch an asset purchasing scheme to try and boost demand across the single currency zone, that would obviously create a profit for anyone already owning eurozone sovereign debt.
The danger is that investors may take on too much risk in their desperate hunt for yield - precisely the factor that caused the financial crisis in the first place.
The other is that, while the eurozone crisis may appear to have ended, it has actually transmogrified into another crisis that can be summed up in a single word - deflation.