James Carville, an advisor to Bill Clinton, famously once said he would like to be reincarnated as the bond market, because then "you can intimidate everybody", The Economist reported in a reader poll. In 2010 two of the euro zone's smaller economies, Greece and then Ireland, were so intimidated by the punishing interest rates that the bond-market vigilantes imposed on them that they had to turn to their richer neighbours for bail-outs. The European Union now has a huge rescue fund in place for member countries that come under attack from the bond vigilantes, and is working on plans to replace this with a permanent mechanism. Spain, a big, indebted euro member often thought of as a potential target for market vigilantism, is now straining to set its finances straight and avoid a roughing-up.
However, although things seem fairly calm for now in the euro zone, last week America's bond yields jumped when President Barack Obama struck a deal with congressional leaders to extend the Bush-era tax cuts and launch a new round of stimulus measures. Some saw this as a sign of increased optimism over America's growth prospects. Others thought it was a first shot across the bows from bond-market investors, showing their increasing worries about the country's deteriorating finances.
As our Buttonwood columnist notes in his blog, Britain's persistently high inflation does not, yet, seem to be reflected in the yields on its government bonds—how long can this go on, he wonders? The British government is bringing in a tough austerity programme in the hope of appeasing the gods of the bond markets, but so was Ireland before the bond markets turned against it.
As we reported in our cover leader last weekend, economic growth in 2010 was surprisingly strong. If this trend continues into 2011, rich-world governments will enjoy stronger revenues and reduced pressures on their welfare budgets, improving their finances and pacifying investors. However, if the global economy takes a turn for the worse, there is no telling what may happen.
So will the vigilantes strike again in 2011? If so, will they continue to focus on picking off the euro zone's weakest members, perhaps breaking the currency zone apart? Or will they turn their attention to even juicier targets like Britain and America? Read more.
Location