The European Central Bank increased its purchases of government bonds last week amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.
Despite spending more than €61 billion ($79.58 billion) since May on government bonds, the ECB has failed to prevent yield spreads between government debt in Greece, Ireland and Portugal and their safer German equivalents from hitting or approaching record highs, making it harder for struggling countries on Europe's fringe to finance their mounting debt levels.
The latest increase in debt purchases "is an illustration that the sovereign-debt crisis is surfacing again, but it's not as severe as May," says Carsten Brzeski, economist at ING Bank in Brussels.
On Monday, yields spreads between Irish and German 10-year bonds—a key measure of investors' perception of the risk associated with Irish bonds—exceeded four percentage points, a record, and more than double the spread that existed on May 10 when the ECB started buying government debt.
Portuguese yield spreads also hit a record Monday, at more than four percentage points above safer German equivalents. That spread was just 1.89 percentage points on May 10, a sign, some analysts said, that the ECB hasn't been able to affect market sentiment. Greek spreads are near record highs at more than nine percentage points above German government bonds.
Personally I believe that sovereign risk in the EU is going to get worse as we enter the fall and austerity measures are going to be felt by the citizens of the country. I am curious as to who is buying the government bonds - is it still the banks? While yields on EU sovereign debt are attractive, I believe they will go higher.
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