Bond Price Rise Leads to Fear of Euro Break-up


These concerns have played out in the market with the euro falling to $1.32, its lowest level for over two months, but also more worryingly on the bond markets where national governments traditionally fund their sovereign debt. Yields on 10-year Belgian bond have risen to just under 3.7%, a percentage point higher than Germany’s Bund price. Meaning that servicing debt will cost Belgium considerably more than its bigger neighbour.

This is a worrying development as Belgium has not been considered as a vulnerable euro-zone country until now. It is thought by market watchers that sustained pressure on Belgian bonds is a sign that financiers believe that the euro could break-up in the near future.

On the downside Belgium has a debt level is around 100% of GDP and the country has been without a properly functioning government since last April and there are concerns that the country could break up. But on the plus side the country has successfully cut debt levels before from a peak of 134% of GDP in 1993 to 84.2% three years ago. Proof that Belgium can repay its debt to the money markets.

The economy is also growing again, by 2.1% against the third quarter of last year. Business confidence is also high and the country’s budget deficit is lower than the euro-zone average. Along with a current-account surplus the threat to the bond price is surprising. It maybe that the market is testing Belgium’s fundamentals or that there is an increasing belief in the financial world that the euro will not retain its current form in the short-to-medium term.