Euro area sovereign crisis drives global financial markets

BIS Quarterly Review  |  December 2011  | 
12 December 2011

News on the euro area sovereign debt crisis drove most developments in global financial markets between early September and the beginning of December. Amid downgrades and political uncertainty, market participants demanded higher yields on Italian and Spanish government debt. Difficulties in meeting fiscal targets in a recessionary environment weighed on prices of Greek and Portuguese sovereign bonds.

Conditions stabilised somewhat in October on growing optimism that the end-month EU summit would propose comprehensive measures to tackle the crisis. But by November, investors were growing sceptical about the adequacy of some of these measures. Sovereign bond yields then rose across the euro area, including for higher-rated issuers.

Meanwhile, financial institutions with direct exposure to euro area sovereigns saw their costs and access to funding deteriorate. Affected banks took measures to further reduce leverage, selling assets and tightening credit terms. Financial institutions also sold certain types of assets to counter increases in the volatility of their portfolios. This included emerging market securities, whose prices plunged in September and fell again in November, while those of safe haven assets rose in a corresponding flight to quality.