Fears that the central banks of Europe and the US may soon end efforts to support financial markets, as well as fresh concerns about the health of Europe's weakest countries, drove down stock markets around the world.
European Central Bank President Mario Draghi indicated he would be hesitant to undertake more monetary easing, citing concerns about inflation. That surprised investors who had been relying on the ECB to help support the region's economy and financial markets. The ECB's programme to supply liquidity to the region's banks helped fuel a rally in sovereign debt as well as European stocks and the euro. In the US, the Dow had its best start to a year since 1998, thanks to an improving US economy and expectations that the Fed will again pump money into the financial system.
"You have a sign that the Fed is very unlikely to keep this liquidity coming, and people are starting to believe that Draghi is serious, and you start to ask yourself the question: What happens if that goes away?" said Dan Alpert, managing partner at Westwood Capital LLP.
As of February, Spanish banks held €142 billion, or 25 per cent, of so-called unstripped government debt, or securities whose interest and principal payments haven't been split into separate instruments, according to data from the Spanish treasury. That was up from €94 billion in December. In the mid-2000s, the Spanish banks' holdings were typically around 6 per cent of the total.
Italy, too, saw substantial domestic buying in early 2012, and there are signs there as well of a falloff in demand. Secondary-market yields on Italian debt have risen markedly since bottoming out in early March. Weak demand could be a particular problem for Italy, which plans to issue €56 billion in bonds in the second quarter.
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