Wednesday, January 23, 2013

Draghi’s Stealth Bomber
Less than six months ago, Europe topped everyone’s Wall of Worry, and seemed set to fall into a financial abyss. The Spanish 10-year government bond yield spiked up to a peak of 7.61% on July 24 of last year (Fig. 8). It has subsequently dropped to 5.10% as of yesterday.

Europe was saved not by a financial bazooka, but rather by ECB President Mario Draghi’s stealth bomber. At the end of July last year, he pledged to do whatever it takes to save the euro. So far, just that promise alone has been enough not only to avert disaster but also to ameliorate financial conditions in the euro zone, as evidenced by falling bond yields and rising stock prices. The euro zone's ZEW economic-expectations index, a gauge of investor sentiment, rose more sharply than expected in January, by 23.6 points to stand at 31.2, reaching the highest level since May 2010 (Fig. 9).

While investor confidence may be improving, there’s still plenty to worry about in Europe. Yesterday, Charles Dallara, who heads the Institute of International Finance (IIF), a Washington-based bank lobby group, told CNBC that Cyprus, rather than Spain, Italy, or Greece, poses the biggest sovereign risk to the euro zone. That’s right: tiny Cyprus.
(Based on an excerpt from YRI Morning Briefing)

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