Bad Credit, No Credit

The yields on European government bonds have dropped markedly over the last few months. These rate drops have given policy makers confidence that the worst of the Euro debt crisis is over with. In fact, the lower interest rates might only be temporary in nature. The true source of renewed confidence in government debt seems to be the cheap three year loans that the ECB is giving out. These ECB loans make it very profitable for banks in Europe to borrow huge amount from the central bank and then invest in sovereign debt. This moneymaking scheme even has an unofficial name: the Sarkozy trade (named after the man who encouraged banks to do exactly what they are now doing). Once the cheap money goes away, however, banks might be wary about giving more loans to governments that are drowning in red ink. As it stands now, Europeans are just happy to have some breathing room!
- Read more about it here: NYTimes