'Europe' Now Has a Soothing Ring to It?

Mario Draghi, president of the European Central Bank (ECB) Photograph by Andrew Harrer/Bloomberg

Since Greece’s insolvent-grade financials first came to light, Europe has consistently and reliably emanated ripples of distress across the Atlantic. Recall the mini-panic of 2011, with its big selloffs in global markets. And periodic fears about the endearingly named PIIGS—Portugal, Italy, Ireland, Greece and Spain—sneezing their malaise onto France and beyond. Then there’s the latest bank-run-that-wasn’t out of Cyprus.

Lately, however, things have seemed so quiet out of Europe that you can’t help but wonder what happened to its sovereign debt crisis. National borrowing costs, long the main stressor on weak economies, are suddenly very comfortable. Italian two-year bond yields hit a record low earlier in the week; Spanish and Portuguese yields fell to their lowest since 2010, while borrowing costs in France and Ireland hit their lowest on record, according to Bloomberg data.

The European Central Bank is under pressure to cut its benchmark rate at its next meeting, the better to stimulate the economies of the recession-plagued continent and keep up with expansionary monetary actions in the U.S. and particularly Japan; keep rates too high, and Europe’s exports to those major economies could suffer. In a note this week, Goldman Sachs economist Dirk Schumacher wrote that he expects the ECB to trim rates by a quarter point at its May 2 meeting.

In this environment, investors are signing up for record low yields from investment-grade corporate bonds in Europe, providing much-needed financial cushions for the likes of Spain’s Banco Santander and Italy’s Unicredit. Microsoft, for its part, just sold bonds in euros for the first time, joining multinationals LVMH Moet Hennessy Louis Vuitton and Nestlé. The average yield investors demand to hold investment-grade, euro-denominated corporate bonds has fallen to a record low 1.84 percent, according to Bank of America Merrill Lynch data.

Of course, the betting man’s wager is that Europe isn’t out of the woods yet. The euro area, after all, must juggle 17 different economies, some of them in borderline depression, most of them economically anemic. Germany is relatively hale but doesn’t have the will or desire to keep funding bailouts or simply going along with the ECB’s “whatever it takes” rallying cry. The present global risk-on environment in equity and debt markets hides many of those warts.

David Zervos, a strategist with the bank Jefferies, likes that the hyper-liquid backdrop is forcing Europe to eschew old taboos about overly loose monetary policy. “And while we always have to watch the Europeans in case they try to start spreading Cyphilis again,” he quipped on Thursday, “… a weak Germany will force the ECB to move in the right direction. So we can thank [Bank of Japan Governor] Kuroda for not only starting to finally fix Japan, but also for competitively devaluing against the German export machine and forcing them to capitulate on foolishly tight monetary policy.”

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