The euro cannot break up: Consequences for financial markets

The trends in yield spreads on dollar - and euro - denominated Italian government bonds show that what investors fear is the risk of a break-up of the euro. But the euro cannot break up, due to the weight of euro-zone countries’ euro-denominated external debt, and investors will come to realise this again. All the risk premia which are due to expectations of a break-up of the euro will therefore disappear, and this heralds a sharp improvement in the euro zone's financial markets.