The eyes of the international economic community are sharply focused on the Fed's monetary policy decision to raise dollar interest rates today, since any uptick could affect international fixed-income yields and spreads in the bond market. That could seriously hurt euro zone bailout programs that involve sovereign debt restructuring.
Indeed, the U.S. rate hike creates competition for non-U.S. dollar bond issues pushing the required yields higher, thus damaging the low-yield environment created by European Central Bank's (ECB) quantitative easing (QE) policy earlier in the year. Apparently, euro zone sovereign yields have already anticipated all this and climbed much higher than the March-April lows.
The German 10-year bund yield scores 0.78 percent vs. 0.079 percent just five months ago. European Union periphery yields have been affected as well. Italy's comparable trades at 1.91 percent, Spain's at 2.12 percent and Portugal's at 2.62 percent, up from 1.25 percent, 1.23 percent and 1.70 percent, respectively, according to Bloomberg.
And here comes the catch: The rise in European yields "nullifies" the effect of the QE policy set out this year and causes serious repercussions to the plans regarding the new policy proposals vis-à-vis future bailout programs and overall sovereign debt restructuring.
According to reports from last Friday's informal European finance ministers meeting in Luxembourg, Germany's Finance Minister Wolfgang Schäuble presented his counterparts with a proposal aimed at weakening the rights of investors in euro zone government bonds so that they shoulder the burden of restructuring the debt of over-indebted sovereign states.
Germany also suggested the further streamlining of the collective-action clauses included in euro zone government bonds, to make it easier to force private creditors into accepting debt restructuring. Germany also wants to force holders of sovereign bonds to accept an automatic extension of maturities whenever a financially distressed euro zone member seeks help from the European Stability Mechanism (ESM) bailout fund.