PARIS: The badly tarnished countries of southern Europe where investors dared not venture at the height of the debt crisis are now the focus of a rush into government bonds.
These countries, in various stages of slow resurrection from near disaster, have turned into a new eldorado for investors seeking relatively secure but satisfactory returns. This flow of money, much of it withdrawn from emerging markets, has pushed up the euro, and also pushed down borrowing rates for these countries, a critical factor enabling Portugal to emerge from its bailout corset on Saturday.
Until the beginning of July, 2012, much of the debt issued by Greece and Portugal, both in rescue programmes, and of Spain and Italy considered to be in danger, was considered toxic by most investors, many of whom were barred by contracts with savers from holding such debt because it was rated as too risky.
But in one breath, the new president of the European Central Bank Mario Draghi turned the tables, saying that subject to the progress with reforms being pursued, the bank was prepared if needed to buy vast amounts of eurozone debt. This put a safety net beneath eurozone bonds and the euro, subject to tough conditions, and the announcement immediately reduced the risks of buying bonds issued by the stricken countries.
Already some speculative investment funds had bought into the debt of Ireland for example, the first country to emerge from a rescue programme funded by the International Monetary Fund and European Union. Since the beginning of this year the flow of investment into the rejuvenated bonds has accelerated rapidly. Countries with debt problems were tipped into crisis when the rates the markets charged to lend to them rose above 6-7 percent.
Rates for Spain and Italy recently plunged to record low levels below 3 percent, although poor first quarter growth figures released on Thursday sent them back above that level.
Portugal’s borrowing rate has fallen below 4 percent. AFP
