Euro zone bond frenzy echoes past battles

European governments eventually saw off that challenge with a sustained display of political determination backed by central bank intervention to defend the European Monetary System.

Whether they can overcome the current panic about sovereign default risks in the single currency area by showing political resolve without mutual financial assistance remains to be seen.

Then as now, traders made money by probing perceived weak links in the EU, forcing the Italian lira and the British pound out of the Exchange Rate Mechanism in 1992 and repeatedly attacking the French franc.

Then as now, there were accusations that the attacks were driven by “Anglo-Saxon” speculators hostile to European monetary union. Markets went wild on Friday afternoon rumors of secret weekend meetings of European finance officials.

After a four-year battle that began in 1992 when Denmark rejected the Maastricht treaty in a referendum, political will eventually prevailed over market forces.

The last great challenge to the franc-deutschemark exchange rate at the heart of the ERM was repelled in 1995 once new French President Jacques Chirac had made clear his determination to pursue orthodox fiscal policies.

Today's debt crisis is both similar and very different. The mounting market frenzy feels eerily familiar.

It began with pressure on Greece, the country with the biggest public finance problems in the 16-nation euro area, but spread last week to Portugal and, to a lesser extent, Spain.

The premium that investors demand to hold Greek bonds rather than benchmark German Bunds narrowed on media reports or rumors of an imminent European bail-out, or of Chinese interest in Greek debt, only to widen further on official denials.

Each strike call, parliamentary setback or glitch in routine debt management triggered a new sell-off or an increase in the price of insuring sovereign debt against default on the highly speculative credit default swaps (CDS) market.

Seasoned market watchers say the gyrations are mainly the work of short-term speculators and do not reflect a fundamental rethink about euro-denominated assets.

“We don't see any fundamental moves at all. It's purely speculative,” said Patrick Smith, senior investment manager at Santander Asset Management.

That speculation is easier because markets are still awash with cheap liquidity injected by the European Central Bank to avert a credit crunch during the financial crisis.

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