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BBC World Service

European bond, debt issues wear on

Andrew Walker Dec 29, 2011

Adriene Hill: There are new worries across Europe. First, in Greece, tax collectors are on strike to protest benefit cuts. Then, across the Mediterranean, in Italy, where the government was able to borrow $9 billion to help pay for services, lots of banks were willing to loan the money — but they demanded a high return. And perhaps most worrisome, the euro currency has lost a whole lot of its value in recent days.

Joining us now is our economic tour guide, the BBC’s Andrew Walker. Good morning Andrew.

Andrew Walker: Good morning.

Hill: So, was the Italian borrowing today a good sign, or a bad one?

Walker: There was some good, and some not-so-good in it, frankly. I think there was some relief that the interest rate on the ten-year borrowing in particular was below the 7 percent threshold — which is widely seen as a particularly acute warning sign. Having said that, it was only just below that level, at 6.98 percent, so it couldn’t have really been much closer. And I think it is a reminder that the financial markets are still not really convinced that the Italian government is going to able to get on top of its debt problem.

Hill: And the euro is dropping — has this been going on throughout the debt crisis?

Walker: Not throughout it, no. In fact, in the first five months or so of this year, the euro actually gained about 18 cents against the U.S. dollar. There’s been a period in which markets have focused, I think, on some of the potential benefits there might be for the euro, if, say, some of the weaker economies were to peel off.

Hill: And why the big drop this week?

Walker: Well I think there’s one particular thing that’s been concerning markets, and that’s been some renewed evidence of weakness in the European banking system. The banks have been putting an increasingly large amount of money on deposit with the European Central Bank, where they only earn an interest rate of 0.25 percent. They could earn more by lending it to other banks, but the fact that they’re not doing so is seen as an indication that the banks generally are very worried about the financial stability of the rest of the banking system.

Hill: The BBC’s Andrew Walker, thanks so much.

Walker: My pleasure.

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