Falling Interest Rates in Europe Aren’t Great News

Because of the loss of confidence in European political leaders, interest rates have dropped drastically in countries like Italy, Spain, Ireland, and Portugal.  A couple of years ago, the high yields on government bonds in Europe were a sign that there was a belief that governments would default on their debts.  However, guarantees made by the European Central Bank to back the bonds issued by countries in the European Union caused a decline in interest rates.  Now, the interest rates have fallen because the economy is weak, thus people are less interested in borrowing money; yields on two-year notes issued by the Italian and Irish governments have fallen to the lowest levels recorded by Bloomberg.

While investors are beginning to lend money at affordable rates in countries like Italy and Spain, the guarantee made by the ECB makes this recent development less encouraging.  Unfortunately, bond rates don’t directly correlate to the “creditworthiness” of a nation, as evident by this situation in Europe.

Written by: Constantine Kostikas

Source: Businessweek.com

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