Do spreads reflect sovereign solvency concerns? ECB says no

Do widening yields on Eurozone government bonds signify solvency concerns? Not according to the ECB:

Progress in financial integration has been fastest in the government bond market, where yields have converged and are increasingly driven by common factors, although local factors – such as differences in liquidity and the availability of developed derivatives markets tied to the various individual bond markets – continue to play a role. The remaining divergences may also reflect (perceived) differences in credit risk, but this should not be seen as an indication of a lack of integration. In particular, the substantial increase in euro area sovereign spreads to the German benchmark since July 2007 seems to have been driven mainly by liquidity concerns related to the financial market turmoil, rather than by differences in sovereign credit risk.

Emphasis mine. Source: ECB Monthly Bulletin, 10th anniversary of the ECB, p.106

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