The world’s largest banks have recently expressed concern about potential market “complacency” over government debt in Portugal and Spain, particularly given the narrowing of the spread between those countries’ bonds and Germany’s, despite the risks to balance sheets in southern Europe. Experts interviewed by JE say demand for these securities shows there is no complacency, but they acknowledge there appears to be a reordering of the hierarchy of spreads in the single currency.

The Communication was launched by the European Central Bank’s Bond Market Contact Group, hosted by the body chaired by Christine Lagarde. This is one of the contact groups set up by the European Central Bank (ECB) and includes around twenty of the world’s largest financial institutions (banks, insurers, funds and international asset managers), as well as the European Investment Bank (EIB) and the Commission.

Representatives of financial giants – Citigroup, Commerzbank, HSBC, Generali, JPMorgan and Morgan Stanley, among others – acknowledge that Spain and Portugal have made progress in “financial fundamentals”, a development that has allowed banks and funds to make good investments. But they note signs of “complacency” on the part of the market, which could prevent further sharp increases in interest rates.

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