Investors sold off government bonds from Spain, Portugal and Italy on Tuesday amid worries that Europe's debt crisis has not been contained by Ireland's bailout but will force more expensive rescue efforts.
The yields on Spain's 10-year bonds jumped as high as 5.7 percent, a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond. That compared with 2.67 points on Monday and below 2.00 points just a week ago.
The spread on Italy's 10-year bond, meanwhile, reached 210 points, also the highest since the launch of the euro, before easing back somewhat. Portugal, whose yields soared last week, likewise saw its spread edge higher.
"Ireland's bailout package has clearly failed to stop the rot in the eurozone markets and if anything it has focused attention on other countries in the periphery," said Mitul Kotecha, analyst at Credit Agricole CIB.
The continued market turmoil "will come as a bitter blow to European officials who had hoped that it would help to turn sentiment around," he said.
Last year the consensus opinion was that we are all Keynesians now. Virtually everyone in the commentariat believed that John Maynard Keynes’s solution for the Great Depression—heavy government spending to resuscitate the economy—was also the answer to today’s global downturn. The first cracks in the consensus appeared with the outbreak of the fiscal crisis in Greece earlier this year. Across the developed world, critics began to argue that government spending had reached the point of diminishing returns, and was producing an anemic recovery that mainly benefited special-interest groups. And the electorate listened. From Europe to the United States, as voters started to reward candidates focused on fiscal discipline and less government intervention, Keynesianism quickly fell out of favor.