The 6 per cent yield level is important because a figure of 7 per cent has been widely cited as a point where a government is seen as falling in danger of defaulting on its debt.

Strategists at wealth and asset management firms have been wrestling with how to reduce risks as eurozone policymakers struggle to deal with the crisis. Even in the bloc’s largest economy, Germany, there are signs of strain. The country failed to get bids for 35 per cent of the 10-year bonds it auctioned yesterday, a development that hit the euro and rattled global markets. The 10-year paper had carried a coupon of only 2 per cent.

Ignis said that while indebted eurozone nations – or the PIIGS (Portugal, Italy, Ireland, Greece and Spain) – may welcome any move by the European Central Bank to print money to alleviate debt burdens, such a move is at odds with the ECB’s remit and does not solve the underlying problem of insolvency. However, the ECB is likely to expand its balance sheet to deal with debt.

“Do you believe in Father Christmas? This is the key question for global financial markets hoping for a temporary solution to the European sovereign debt crisis. All their Christmases would come at once if the ECB commits to unlimited purchases of peripheral government bonds. This would immediately solve the liquidity problems and relieve the pressure on peripheral government to rapidly consolidate their budget deficits and undergo painful and politically divisive restructuring of their economies,” said Stuart Thomson, chief economist at the UK asset manager.

But he warned: “This unfortunate consequence of more active ECB largesse highlights the prisoners’ dilemma that the Central Bank finds itself in and the inevitability of a sub-optimal outcome. More importantly, the crisis is not one of liquidity but solvency, and the ECB does not have a mandate for unlimited funding of insolvent governments.”

Thomson likened the straitjacket imposed on eurozone governments to the old Gold Standard regime that used to link a currency such as the dollar or sterling to the price of gold.

“Indeed, the single currency has contributed to the build-up of these imbalances within the eurozone by encouraging the expansion of current account deficits within the periphery over the past decade that paced the deterioration in competitiveness in these economies. In the wake of the global credit crunch, private sector investors have become increasingly reluctant to fund these persistent current account deficits,” Thomson said.

He warned that deleveraging of consumer, government, company and financial balance sheets in Western Europe will lead to recession, hitting economies in Eastern Europe, for example.  

As far as the euro is concerned, Thomson is bearish.

“The euro has held up remarkably well in the absence of supporting flows from mercantilist central banks. The current tight market range represents an unstable equilibrium between recapitalisation flows by European banks from the rest of the world and the run on banks and sovereigns by investors in the rest of the world. We believe that this equilibrium will resolve itself in a significant weakening of the euro against the dollar and sterling during 2012,” he added.