We are probably in the middle of a credit contraction globally and the chances of another credit-boom evolving in the foreseeable future are minimal. The risk of a credit-fuelled boombust, should a country enter the eurozone in the next couple of years, is greatly reduced. Third, the crisis may have increased the disciplining power of financial markets.
The deleveraging process that we are going through implies a thorough repricing of risk. Just like in other asset classes, there is increased differentiation among government bonds based on the issuers’ risk profile. This is well illustrated by the unprecedented differences we currently see between CDS spreads on bonds of euro area sovereign issuers.