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Updated 15:44 11/05/21

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Negative interests could cause the biggest default in financial history

Duncan Richardson, News Editor
29 Apr 2015, 10:56 a.m.

30% of all eurozone sovereign debt is trading with a negative interest rate. The ECB’s quantitative easing program has driven yields to levels never experienced before.

Investors appear to have lost their collective minds and are now prepared to pay governments for the privilege of lending to them. 70% of all German bunds are now in negative territory, 50% of all French debt and incredibly 17% of all Spanish debt.

Not only has this never happened it’s a complete turnaround from the height of the economic crisis when yields reflected the real chance of a sovereign default. Economists and commentators are becoming extremely concerned negative yields are sign of economic weakness.

Much of global growth since the 2008 crisis has been driven by rising debt levels. Sovereign debt has taken over from rising personal and corporate debt. Combined debt of the G7 countries has risen from 80% to 120% of GDP. Policy makers have tried to solve the problem of too much debt with even more.

Quantitative easing has driven yields lower and caused investors to seek yield in riskier assets. This would explain why stock markets are defying economic reality and reaching new highs.

The 2008 economic crisis has ushered in a new era of cheap money and soaring asset prices. Eventually the bond market will correct and losses suffered, however, until that point governments will continue to extend and pretend.

Keynesian economics appears to be failing, but what will come next?

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