No surprise: the ECB stepped up its bond purchases last week as Irish yields soared in the resale market, and Greece and Portugal issued new debt at inflated yields. Quite how high the yields would have been in all three cases were it not for ECB intervention, we can’t tell. But the ECB bought €1,073m bonds in its security market programme, the highest since 2 July, barring one episode in October (see chart).
More PIGS* woes today, as the Greek budget deficit worsened. In line with last week’s rumours, the deficit is now projected to reach 9.4 per cent of GDP, missing the 7.8 per cent target by some margin. In Portugal, the finance minister spoke on the possibility of a bail-out – judging the risk to be “high” for external, not domestic, reasons. Contagion was spreading like ‘wildfire’, he said, and no eurozone member could feel safe.
Dublin is still resisting aid, while the debate is shifting to deposit outflows from Ireland’s largest banks. Read more
The key level of 8 per cent has been rapidly passed today by rising Irish ten-year bond yields. London clearing house LCH.Clearnet has now moved to protect itself from any possible restructure, by making it more expensive to trade Irish debt.
LCH.Clearnet, the world’s second largest fixed income clearing house, said an additional 15 per cent margin requirement would be charged on investors’ net exposure to Irish bonds because of the increasing risk of a sovereign default. It’s another blow, following news that some SWFs were divesting Irish and Portuguese debt. The ECB is apparently buying Irish debt yet again.
Tension rose today following a Portuguese debt auction. Lisbon did sell €686m 10-year bonds and €556m 6-year bonds, less than the guideline range, which was €750-1250m in both cases. (Selling less than the guideline amount has been a feature of Portuguese debt auctions since July.)
Yields, however, were punitive. Lisbon will pay 6.81 per cent Read more
The Greek cost of debt has just risen quarter of a point: Greece will repay the markets €300m over six months at 4.82 per cent, up from 4.54 per cent at the last auction in October. The rise takes the Greek cost of debt back up to highs in 2008 (see red spots on chart).
Greece is testing the market, auctioning short-term debt roughly monthly instead of quarterly (see blue bars on chart). Six month and three month bills are still being regularly offered, but there have been no 1, 5 or 10-year bonds since April and no other maturities for even longer.
The timing of Greek debt auctions has been pretty good, to date, raising funds in periods of relative market calm. The secondary market has been wild at times – above 10 per cent – but the maximum agreed yield at auction was a trifling 5.09 per cent in 2008.
This may lend hope to Ireland, Read more
Falling Portuguese and Irish bond prices of late will have been hurting whoever is holding them. But who?
If the stress test result data is anything to go by, German banks are the most exposed of Europe’s larger banks. Caution is required here, as the stress test sample excluded medium and small banks, plus this is trading book data and positions will have changed. Caveats in mind, nine of the 14 German banks to be stress tested had exposure to Irish and Portuguese sovereign debt, totalling €4.1bn.
WestLB, Espirito Santo, Santander and RBS were easily the most exposed to the sovereign debt of both countries combined; each had more than €1bn in exposure, mostly for Portugal. Caixa Geral, Credit Agricole, HSBC and SocGen each had more than $750m.
These data should be seen in context: Read more
The premiums investors demand to hold Irish or Portuguese bonds instead of German have now passed the levels that precipitated the Greek bail-out.
Bond spreads reached 453bp for Ireland and 441bp for Portugal in trading today – higher than Greek bond spreads were in late April, just before they headed toward 800bp. Read more
Portugal is the latest PIIGS government to suffer a sharp increase in its cost of debt. Like Ireland earlier in the week, Portugal has raised a significant amount of debt at auction at roughly one percentage point above the last auction.
Unlike Ireland, Portugal raised just three-quarters of its intended €1bn offering – not because of a lack of demand, but because Lisbon refused to accept the very high yields demanded by some investors. €400m of 2014 bonds sold at 4.695 per cent; €350m 2020 bonds sold at 6.242 per cent. Read more
Temporary fiscal stimulus can work, but keep priming that pump and the effects wear off. This is the conclusion of research from the Bank of Portugal, investigating whether small euro-area economies are affected in the same way as large ones (conclusion: yes, they are).
Fiscal stimulus is important here, because the single currency limits the monetary options available to euro members. So, the conclusions:
The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies.
Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country’s risk premium, the effectiveness of the stimulus might be negligible.
So maintaining credibility is extremely important: even the temporary stimulus may have limited or no effect if credibility is low, such as during financial distress. In this case, no action might be the best bet: Read more
Portugal can still raise medium-term debt in the markets, but only at a price. Five-year bonds just auctioned at a weighted average yield of 4.657 per cent, IGCP figures show. This is a sharp increase from 3.701 per cent for the same maturity bonds auctioned last month (see chart). Demand for the issues were stable, with a bid-to-cover remaining at 1.8, and €943m bonds sold.
Had the yield been much higher, Portugal might have been as well off turning to the European Stability Fund, where 5 per cent is mooted as a likely charge. On that score, Portuguese banks are leading the way: funding from the ECB more than doubled last month to €36bn.
You can always hope.
As more details unfold about European austerity programmes, reports asked Charles Evans, Chicago Fed president, what the potential effects would be on the United States. According to Reuters, Mr Evans responded:
I’m hopeful that our exposure will be minimal to modest.
Being hopeful is one thing, expecting something to happen is another.
Of course, there are those that are far less hopeful (or is it expectant?) Read more
The Spanish pledge to extra fiscal austerity —apparently following a call from President Obama— has calmed markets. Measures include:
For comparison, this is a breakdown of the Greek proposal:
Recently, Ireland hinted it might skip some debt auctions. Now Portugal has gone further, offering to buy back the remaining €4.6bn of €5.6bn May bonds maturing next Wednesday. (The country bought back €1bn on Monday.)
As well as lowering the cost of debt, the moves are intended to calm markets that are hypervigilant to signs of sovereign debt distress. Both countries are signalling their solvency by using their cash buffers to guard against unusually high cost of debt at current auctions.
When the European Central Bank circus leaves Frankfurt, seasoned watchers generally assume it will eschew dramatic action. Without the Frankfurt apparatus of advisers and experts, the feeling is that the 22-strong governing council will play it (extra) safe.
That is not always the case – for instance, at its Brussels meeting in December 2008, the ECB slashed interest rates by 75 basis points, which was a radical step for the notoriously conservative institution. Read more
The Greek cold has turned into ‘flu, and Portugal has started sneezing.
The Greek government’s cost of debt rose dramatically today, and the cost of insuring that debt rose with it —spectacularly. Greek 1-year credit default swaps are trading (very thinly) at an all-time high of 1000 basis points, according to Markit data; a 57 per cent rise in a day. It now costs €1m to insure €10m 1-year debt. The markets are effectively pricing in a debt restructure within the year. Read more
Public sector wages in Portugal will be frozen until 2013 as part of government plans to cut the deficit from 9.3 per cent last year to below 3 per cent by 2013. Wage increases would, at best, match inflation.
The Socialist minority government’s 2010 budget bill, which is set to be approved as a whole in parliament today with the abstention of the centre-right Social Democrats, includes this public sector wage freeze (from Diario Economico via Reuters). Read more