As difficult as last two years have been for Europe, 2012 could be even tougher. Each week, countries will need to sell billions of dollars of bonds ? a staggering $1 trillion in total ? to replace existing debt and cover their current budget deficits.
At any point, should banks, pensions and other big investors balk, anxiety could course through the markets, making government officials feel like they are stuck in a scary financial remake of ?Groundhog Day?.
Even if governments attract investors at reasonable interest rates one month, they will have to repeat the process again the next month ? and signs of skittish buyers could make each sale harder to manage than the previous one. ?The headline risk is enormous,? said Nick Firoozye, chief European rates strategist at Nomura International in London.
Given this vicious cycle, policymakers and investors are closely watching the debt auctions for potential weakness. On Thursday, Spain is set to sell as much as 5 billion euros ($6.3 billion) of government bonds. Italy follows on Friday with an auction of more than $9 billion.
The current challenge for Europe is to keep Italy and Spain from ending up like Greece and Portugal, whose borrowing costs rose so high last year that it signalled real likelihood of default, making it impossible for the governments to find buyers for their debt. Since then, Greece and Portugal have been reliant on the financial backing of the European Union and the International Monetary Fund.
The intense focus on the sovereign debt auctions ? and their importance to the broader economy ? starkly underscores the difference between European and American responses to their crises.
Since 2008, there has been almost no private sector interest to buy new United States residential mortgage loans, the financial asset at the root of the country?s crisis. To make up for that lack of investor demand, the federal government has bought and guaranteed hundreds of billions of dollars of new mortgages.
In Europe, policymakers are still expecting private sector buyers to acquire the majority of government debt. Last month, in perhaps the boldest move of the crisis, the European Central Bank lent $620 billion to banks for up to three years at a rate of 1%.
Some officials had hoped that these cheap loans would spur demand for government debt. The idea is that financial institutions would be able to make a tidy profit by borrowing from the central bank at 1% and using the money to buy government bonds that have a higher yield, like Spain?s 10-year bond at 5.5%.
But the sovereign debt markets continue to show signs of stress. Italy?s 10-year government bond has fallen in price, lifting its yield to more than 7%, a level that shows investors remain worried about the financial strength of Italy?s government.