8th February 2012
In 2012, at least up to the first week in February, it has been a very different story. If you were looking at the markets alone over that period, you could have been forgiven for thinking that the eurozone had solved all its problems, that Greece was back on track and that the euro economies were growing wonderfully.
In fact, of course, at the time of writing, Germany was almost certainly experiencing a second consecutive quarter of contraction (the very definition of a recession) and the prospects of Greece securing agreement from its private sector investors (PSI) were looking grim. Moreover, beyond Greece, the deep seated problems of Portugal and Italy were being signalled once again by rising CDS spreads (i.e. the cost of securing insurance on Portugal and Italy's sovereign debt, versus German bunds, was increasing).
What has boosted the markets in the teeth of all this structural bad news is that investors, notably Europe's banks, appear to have rediscovered their appetite for high yielding Italian, Portuguese and Spanish debt. Recent debt auctions by Europe's more troubled economies have gone well and been achieved at much more modest rates by comparison with the unsustainable rates of 7% and more being demanded a few months ago.
In reality there is little mystery about this rediscovery of appetite for debt by the European banks.
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